SBA 7(a) loan rates are variable, tied to the prime rate plus a spread. The Fed raised prime from 3.25% in March 2022 to 8.50% by mid-2023 — a 525 basis point increase — before beginning cuts in late 2024. Every business acquired with SBA debt during or after that run-up is operating in a materially different financing environment than deals underwritten at 2021 rates. Understanding exactly how rate changes flow through deal math is not optional for anyone working in ETA today.
How SBA 7(a) Rates Work
SBA 7(a) loans are priced at a floating rate: prime rate plus a spread. The maximum allowable spread depends on loan amount and maturity. For loans above $350K with maturities over seven years — which describes most acquisition loans — the maximum spread is prime + 2.75% per SBA guidelines. Lenders occasionally price below maximum, but in practice most ETA acquisition loans price at or near the maximum spread.
The prime rate as of this writing is 7.50% (reflecting the Fed's cuts from the 2023 peak of 8.50%). The effective SBA rate for most acquisition loans is therefore approximately 10.25%–10.50%. Compare this to 2021, when prime was at 3.25% and acquisition loans were priced at 6.00%–6.25%. That 4.25% increase has enormous consequences for deal math.
The DSCR Arithmetic
Consider a business generating $1M in EBITDA. Assume a market-rate management salary of $150,000 and a maintenance capex reserve of $50,000. Cash available for debt service (CFADS) is therefore $800,000. The SBA requires minimum 1.25x DSCR, meaning maximum annual debt service is $640,000 ($800,000 / 1.25).
At a 6.25% rate on a 10-year fully amortizing loan, $640,000 in annual debt service supports a loan of approximately $4.7M. Add a 10% equity injection and your maximum supportable purchase price is approximately $5.2M — a 5.2x EBITDA multiple.
At a 10.25% rate on the same structure, $640,000 in annual debt service supports a loan of approximately $3.9M. Add the same 10% equity injection and your maximum supportable purchase price drops to approximately $4.3M — a 4.3x EBITDA multiple. The same business, the same earnings, the same lender requirements — but the rate increase alone has removed nearly $1M from the maximum price a buyer can pay and still clear lender requirements.
Why This Matters for Deal Pricing
When rates rise, buyers cannot support the same headline multiples. In a market where sellers anchored their expectations to 2021 multiples (when acquisition financing was cheap), this creates a valuation gap: sellers want 5x–6x, buyers can support 4x–4.3x without violating DSCR minimums. Deals that cannot bridge this gap do not close.
The practical implication: buyers in a high-rate environment should explicitly model DSCR at the current rate — not at the rate they hope rates will be in 18 months. The deal must work at today's rates. Any improvement in the financing environment is upside, not underwriting assumption.
Structuring Deals to Manage Rate Risk
Three structural approaches reduce rate exposure in ETA deals. First, increase the equity injection above the 10% minimum. A 15%–20% equity contribution reduces the loan amount, reducing the rate-sensitive portion of your capital stack. The economics of this depend on your opportunity cost of equity capital — but in a high-rate environment, equity is often cheaper than debt. Second, use seller financing to replace some SBA debt. Seller notes can be structured at fixed rates (5–8% is typical), insulating that portion of your debt stack from prime rate movements. A $500K seller note at 6% fixed replaces $500K of SBA debt at 10.25% floating. Third, negotiate SBA loan prepayment provisions to allow refinancing if rates fall. Standard SBA 7(a) loans have no prepayment penalty after the first three years — model the refinancing scenario explicitly.
Rate Sensitivity on Returns
Rising rates compress not just deal prices but equity returns. A deal modeled at a 25% IRR at 6% financing rates delivers approximately 18–20% IRR at 10% rates on the same operating performance and exit multiple, simply because more cash goes to debt service and less accrues to equity. For ETA investors comparing search fund returns to alternatives, this rate sensitivity is a key part of the current investment thesis discussion.
The most rate-resistant ETA deals share common characteristics: businesses with strong, growing free cash flow (high cash conversion), low capex requirements, asset-light operating models, and purchase prices that provide significant headroom above the DSCR minimum — so that when rates move, the deal does not immediately breach covenant thresholds. Buying at 4.0x when the DSCR maximum supports 4.3x gives you almost no cushion. Buying at 3.5x against a 4.3x maximum gives you meaningful resilience.