Why the Cash Left After Closing May Be the Most Important Cash in the Deal

This post is for informational purposes only. I am not an attorney or an accountant. SBA rules and lender credit policies change. Consult your own advisors for your specific situation.

Most first-time buyers treat the equity injection like a finish line. They map the 10% needed to close, they hunt for every dollar that counts, and then they relax. A few weeks later a credit officer asks a quieter question: after you wire the equity injection and pay closing costs, what is left in your personal accounts?

That second number is what is referred to in the industry as “Post-Closing Liquidity”. It is not the same thing as the down payment. It is the cash you still control the morning after closing. It is the money that will be available should a hiccup occur with the business or personally.

I have written separately about where your equity injection can come from. This post is about the cash that has to survive that injection. Across 890+ approved loans and more than $1.4B in approved volume, the pattern is consistent: buyers who clear the equity injection hurdle but lack liquidity after closing make credit committees nervous.

Those three definitions matter because buyers often solve the equation based on the wrong starting point. They take 10% of the purchase price, empty a brokerage account to hit it, and assume they are done. The lender is looking at the full project cost, the injection source documentation, and the balance that remains after the wire clears. The 10% equity injection needs to be based on the purchase price, working capital, and closing costs built into the project. That is the only way you can be sure you have adequate equity before even considering your post-closing liquidity.

SBA SOP 50 10 8 sets the injection floor. Post-closing liquidity thresholds are lender-specific credit policy and vary by institution, deal size, and industry.

From a lending perspective the fear is simple. The bank is underwriting future cash flow of a business the buyer has never owned. Add-backs may shrink. A key customer may delay payment or even worse, fail to make a payment. Working capital may run quicker than the quality of earnings report suggested. If the buyer has no personal liquidity left, every surprise becomes a problem that not only puts the loan in jeopardy but could also put the success of the business itself in jeopardy.

In addition to business issues, there is always the risk the owners / guarantors will experience some sort of life event or family emergency that could impact their personal cash need. This could be a fire, flood, car accident, illness, birth of a child, loss of spousal employment, major home repair, etc. Lenders want the owner / guarantors to have access to cash personally to resolve these problems without having to drain the business of cash to cover personal expenses.

It is important to note that this is generally a bank credit decision, not an SBA program parameter. The SOP tells the lender how to verify the equity injection. It does not publish a universal post-closing reserve formula. That is why the same buyer can look fine with one lender and be denied by another lender for post-closing liquidity requirements. We work with 500+ funding partners and more than 100 SBA lending teams for exactly that reason: lender fit is part of the structure.

That line is not a slogan. It is in the credit files I keep seeing. A buyer who preserves reserves can absorb a slow first quarter. A buyer who does not often starts shopping for expensive short-term money, or worse, stops paying something else to keep the SBA note current.

When we start discussing post-closing liquidity, I often get the above question. Unfortunately, with no set SBA policy or requirement on post-closing liquidity it leaves the decision up to lenders. Although some lenders have chosen to put into place generic rules related to the amount of post-closing liquidity they require, many lenders judge the amount available on each deal in the credit process and do not set a required amount.

The lenders who have a post-closing liquidity peg typically want to see anywhere from 2% to 10% of the loan amount in post-closing liquidity. Assuming a $2 million deal with a 10% liquidity peg, that could be substantial at $200,000. That means a buyer needed $400,000 in personal liquidity or raised capital going into the deal to make both the equity and post-closing liquidity requirements work.

Those lenders that do not set a peg look at risks such as how consistent revenues are, how much working capital is built into the business at closing, what fallback assets the seller has, what other sources of income do the guarantors have or do they only rely on the subject business, what does the collection cycle look like for the business etc. A retail business where cash comes in at time of sale is much lower risk for working capital issues than a business that does construction and bills and gets paid 30 or 60 days later, so these lenders will determine how much post-closing liquidity they want to see based on the subject deal.

You are not going to like the answer to this question, because again this is not an exact science and lender dependent. Sources of equity for the down payment on an SBA loan are detailed in the SBA SOP. However, it is not detailed for post-closing liquidity. Different lenders will accept different things to verify post-closing liquidity, but below are some of the items lenders will accept:

• Cash & marketable securities left over post-closing — accepted by all lenders.
• Retirement assets — not all lenders will count them but some will, or will count a percentage of them after taking into account taxes if they need to be liquidated.
• Home equity lines of credit — most lenders will count equity available on a home equity loan for your residence or investment property.
• Gifts of cash or investor cash — usually counted towards post-closing equity.
• Gold, silver, and Bitcoin — some lenders will consider these as assets with almost a cash value and available to support post-closing needs.

Please keep in mind, unlike the equity you put into the acquisition that must come from verified and seasoned sources, the post-closing liquidity you have does not need to be seasoned. So you can use cash or other assets you have received more recently. We recommend looking at all assets you have that are liquidatable or could be liquidated easily and putting together a breakdown of what assets you could get at post-closing to cover any business or personal needs that might come up after your acquisition is closed.

Take a $2.5 million acquisition. Add $75,000 of closing costs and fees and $100,000 of working capital financed into the project. Total project cost is $2,675,000. The 10% injection floor is about $267,500. With a qualifying seller note on full standby for the life of the loan, the buyer cash piece can drop to roughly $133,750.

Notice the third row. Dumping more cash into the injection does not automatically solve the problem if it empties you out. Credit officers care about both the equity that went into the deal and the liquidity that stayed with you.

Now, if you put post-closing liquidity on that at 2% to 10% of the loan amount, you would need another $50,000 to $250,000 of assets to serve as post-closing liquidity. You need to be sure you are prepared for that when you apply for the loan.

When a buyer asks me whether they have enough capital, I do not start with the purchase price. I start with the reserve they need to sleep at night, then reverse into structure.

I have to volunteer my conflict of interest here. CLX earns a success fee when deals are approved and close. I have a financial incentive to keep buyers moving and to find structures that get loans approved. I am naming that so you can weigh what follows accordingly.

Truthfully, this is one of the topics where my honest advice often slows people down. If your liquidity only works on a spreadsheet that assumes nothing goes wrong in year one, I would rather tell you that before the LOI than watch the deal die in underwriting, or worse, close and then starve for cash.

If you want a free read on whether your injection and reserve stack will hold up with real lenders, that is a conversation we have every day. We can tell you on day one how a credit officer is likely to view the file, and which partners are more realistic for your specific capital picture.

You can reach me directly at brad@commerciallendingx.com or by phone at 630 988 4852.

Brad Hettich, President
Commercial Lending X