Snack Time: How to Thrive in a Frozen Funding Market

Hey, this is Roland Frazier. Welcome to Business Lunch Snack Time, the snackable edition of the show where I take my thoughts and with a little help from AI I turn them into quick hit episodes packed with insight. So this isn't just automation. It's hours of research, writing, refining and shaping the ideas that I've got until they sound like the way that they feel in my head, or at least the way they evolve in my head. Every topic is going to start as notes on my phone or voice memos between meetings, or maybe a late night thought or super early morning one that I just can't let go. And then I use AI as my creative partner. So it helps me test, phrasing and sharpen the story and bring it to life in a way that I feel fits the pace of this new world of business that we are excitedly getting involved in right now. So today we're going to dive into the massive freeze in small business financing. How the SBA shutdowns completely stalled, the main street acquisitions that are going on. Right, the everyday businesses and what that means for buyers and sellers, how to actually find opportunity in the middle of all of this chaos and crisis. And we're going to break down the scale of the freeze. Why? It's creating a unique window for non SBA buyers right now. And it will have kind of this lagging effect in the future as well as the strategies that smart operators are using right now to keep deals moving even while billions of dollars in loans stalled are sitting on absolute hold. Not going anywhere. So grab a quick bite of business strategy. This is your snack time episode of Business Lunch.

Welcome to the deep Dive. Today we're really digging into something affecting, well, anyone trying to buy or sell a small business. Right now we're talking about the federal shutdown and the immediate impact it's having.

Yeah, the deep freeze on funding. Our mission today is pretty focused and honestly, pretty urgent. We're looking at the expert strategies the actual Playbooks acquisition folks and owners are using to keep deals moving when the main engine SBA lending is just shut off. We need those practical non SBA solutions people are putting into action right now. And just to set the stage, the scale of this freeze is, well, it's staggering. The SPA itself estimates about $170 million in loans are hitting a wall every single business day.

That's huge.

It is. Think about it. That's around 320 small businesses daily stuck. The deals are on hold because the main programs, the 7A and 504, they're just not processing that's a massive immediate hit to liquidity.

And it's crucial context to remember just how central that SBA flow is. Yeah, I mean, last fiscal year, FY25 was a record year. The SBA backed what, 84,400 loans? $45 billion.

Yeah. It shows how deeply woven this capital is into the whole small business. M and A fabric. It fuels tens of thousands of deals every year. So when you turn off that tap, especially if it stays off for a while, the ripple spread. We're already seeing forecasts, you know, predicting a hit to the wider GDP could be $7 billion, maybe even $14 billion. If this drags on, it's not just an inconvenience, it's a real market shock.

Okay, so let's break down the mechanics here, because I think the natural reaction is, okay, government shut down things, pause. I'll just wait it out maybe a few weeks and jump back in.

Right. Get first in line when it reopens.

Exactly. But the research, the sources we looked at, they strongly suggest waiting is actually the losing strategy here. This freeze counterintuitively creates a short term opening for certain buyers. The material calls it a liquidity shock. Can you unpack that a bit? How does stopping government funding suddenly create a. Well, a potential advantage or mispricing in the market?

Sure, it's a classic disruption scenario, really. Think supply and demand, but with friction. The supply of good businesses up for sale doesn't just vanish overnight. Owners still want to sell.

Right.

But the demand side takes an immediate hit. Why? Because a huge chunk of buyers, maybe the majority, for many deals, rely heavily on that SBA backed 7A loan. It's often the cheapest money available.

Okay.

When that disappears suddenly, the pool of qualified buyers shrinks dramatically. So you get this temporary window where good solid businesses might be, let's say, undercompeted for the price might not reflect its true value simply because the usual crowd of bidders isn't there. That's the mispricing opportunity.

That makes sense. And this ties into a big misunderstanding people might have about the lenders themselves, particularly the PLP banks, the preferred lender program ones, there's this hope maybe that they have some special power to keep things moving.

Yeah, that's a critical myth to bust right now.

It's not true they can't issue approvals.

Absolutely not. That preferred status, that delegated authority, it only applies to how fast they can approve. Under normal SBA operating conditions, during a full federal shutdown, where the SBA isn't processing guarantees, they are completely Blocked from issuing new SBA loan approvals, full stop.

So leaning on your PLP banker won't help for a new SBA loan right now?

Correct. It's wasted effort if you're trying to get a new SBA approval through. You need a different plan if you want to close during the shutdown. And you know, related to that waited out idea, think about the backlog. Lenders and the CDC is the certified development companies for 504 loans. They aren't just sitting on their hands, they're already taking in files, pre processing.

What they can, getting ready for the floodgates to open.

Exactly. The moment the SBA reopens, there's going to be an absolute tidal wave of application hitting them. If your deal package isn't perfectly clean, totally ready to go, you're not going to be first in line. You'll be buried. Waiting might mean waiting much longer than you think.

So the uncertainty itself, this whole situation, it actually becomes a tool in the negotiation. That $170 million frozen daily figure isn't.

Just a statistic, it's leverage. If you're a buyer prepared to close without the sba, you can point to this macro situation. You can say, look, there's systemic risk here that affects your ability to sell, Mr. Seller.

Right.

And that gives you a legit ethical basis to negotiate on structure. Maybe not price initially, but definitely structure. Like more seller financing, different terms, maybe a faster timeline. You're offering them the one thing that's suddenly scarce, certainty of close.

And I suppose if you as a buyer don't bring this up, if your offer or your diligence plan just ignores the giant elephant in the room and.

Shut down, that's a huge red flag for the seller. It signals you're inexperienced or unprepared for the current reality. Any serious letter of intent right now must acknowledge the shutdown risk and propose a clear path forward. Doesn't rely solely on the SBA reopening tomorrow.

Okay, this is crucial. Let's pivot to the actual solution then. If waiting is losing and the goal is velocity, closing deals now to potentially capture that temporary market dynamic. What's this? What's the toolkit? What does the non SBA capital stack actually look like?

It's about layering. You're replacing one big cheap source, the SBA loan, with several other pieces. And the absolute first place you go, the foundation, is seller finance.

Getting the seller to carry paper, a lot of paper.

You're aiming for maybe 60%, sometimes even up to 90% of the total deal value. Through a seller note, maybe combined with some deferred payments. And you structure that note carefully with performance covenants to protect buyer.

Okay, and the source mentioned something interesting here. As an alternative to a traditional earn out, which can get messy, especially without the SBA's rules. The CVR contingent value.

Exactly. CVRs are cleaner, especially in this context. Think of it as a contractual promise from the buyer to pay the seller an additional amount if a specific clear cut milestone is hit down the road.

Like hitting a certain revenue number precisely.

Or an EBITDA target by a specific date. It gives the seller that potential upside like an earn out, but it avoids the operational tangles and reporting headaches that often come with earnouts. Since you don't have SBA oversight on the debt structure right now, CVRs are really flexible tool to bridge valuation gaps and give sellers a reason to accept a deal today.

Okay, so layer one is maxed out seller financing, potentially using CVRs. What's layer two? Where does the next chunk of cash come from?

Layer two is senior debt. But without the SBA guarantee, you're going to community banks, credit unions, maybe some non bank lenders. They'll underwrite a standard term loan based purely on the business's fundamental meaning, collateral and cash flow. Right. It's all about the quality of the assets they can secure and crucially, the debt service coverage ratio, the dscr. Can the business's cash flow comfortably cover this proposed new debt payment? That's the key metric. And alongside that term loan, you might layer in specific working capital lines. Think asset based lending, ABL against accounts receivable or inventory. Or maybe specific equipment financing if it's a heavy asset business. The point is the entire credit market isn't frozen, just the SBA guaranteed slice.

Okay, so seller note, non sba senior term loan, plus maybe some ABL or equipment finance. But I'm guessing there's often still a gap. Right? The SBA loan usually covers a pretty big piece. This is where the expensive money comes in.

This is where it can get pricey.

Yes.

That final piece, often smaller, might come from mezzanine debt or maybe revenue based financing. Rbf. You have to be clear eyed about it. This capital will cost more than the 7 loan you originally planned on.

So why use it?

Because you're buying two things, time and auctionality. You're paying a premium to close the deal now, secure the asset and capture whatever advantage the current market offers. You view this expensive slice purely as a temporary bridge. It's not the long term plan.

Which brings us to the Escape hatch. If this expensive debt is just temporary, you need a way out. Once the SBA does reopen, how do you ensure you're not trapped?

You plan the escape from the very beginning. It has to be baked into the letter of intent loi you issue right now you absolutely need a pre negotiated refinance provision.

What does that look like? Specifically?

It means clear terms saying things like no prepayment penalty on this bridge debt after say six or 12 months. It means an explicit right for you, the buyer, to easily swap collateral later to secure the new SBA loan. And importantly, it means getting pre agreed intercreditor terms between your temporary senior lender and your mez RBF provider.

So everyone knows the plan is to refi into SBA later?

Exactly. You're closing the deal now with this alternate stack, but you're structuring all the temporary debt specifically so it can be easily and cleanly replaced by a cheaper SBA 7A or 504 loan as soon as possible after the shutdown down ends.

That makes perfect sense. A very tactical approach for buyers. But the sources we looked at also gave clear steps for sellers too. How should sellers position themselves right now to stay, as the material called it, exit ready?

Sellers need to be proactive. The sources highlighted three key sprints for them. First, be willing to trade price for certainty, or rather trade structure for certainty. They need to accept that buyers offering a definite close now will likely need more seller paper, maybe holdbacks, maybe an escrow. Certainty has a premium in this market.

So flexibility on terms is key for sellers.

Absolutely. Second, sprint clean up the back end now. When the SBA reopens, lenders will be swamped and they'll prioritize the cleanest, easiest deals. Sellers need to get ahead of this. Clear any old UCC liens. Those uniform commercial code filings settle any outstanding tax issues. These seemingly small things become major roadblocks when everyone's rushing.

Get the house in order precisely.

And third, data readiness. Get your financial information organized. Almost like a mini quality of earnings report. What the source called a QOE light.

Not a full audit, but the key stuff.

Exactly. Maybe eight to ten critical schedules, things like normalized networking, capital calculations, customer concentration lists, clear proof of cash flow. Lenders will grab the files that are clean, complete and easy to understand. Disorganized files. They'll go to the bottom of the pile or get rejected outright.

Okay, makes sense for sellers now for buyers, the source laid out a very aggressive 10 day no SBA sprint. 10 days sounds incredibly fast to line up a Deal and financing. How do you do that without cutting corners? On diligence.

The speed comes from intense focus and parallel processing. Not necessarily less diligence. The playbook mitigates risk by front loading the critical path. Items days one through four are all about alignment and options. Alignment meaning sorting your deal pipeline. You hyper focus on targets where you suspect you won't be competing against SBA reliant buyers. Think asset heavy businesses. Maybe subscription revenue models that appeal to non SBA cash flow lenders. Then you make the capital calls not for commitment yet, but for options. Line up preliminary interest from maybe two non SBA senior lenders, an ABL provider, a bridge MEZ option so you know.

The potential pieces are available before you even make an offer.

Exactly. Options ready. So by day five you've got a likely target and confirmed potential capital sources. That's when you issue the structural loi.

And this LOI reflects the current reality?

Absolutely. It's heavy on the seller finance percentage you need. It probably includes that CVR structure to offer upside. And critically, it has that refi on reopen clause explicitly stated. It sends a clear message I can close now under these terms because I have a plan B for funding.

Okay, LOI out on day five then. Days six through eight are about data and proof.

Right? This is the sprint to populate the data room with the seller's QOE light info, your cash flow models based on the proposed structure. And crucially, you draft that one page risk memo.

What's the purpose of that memo?

It's your credibility document for the seller. It briefly outlines the shutdown risks, explicitly states the alternate non SBA capital stack you've already lined up, naming the types of lenders, if not specific names yet, and shows you have a concrete plan to close despite the SBA freeze. It reduces the seller's fear that you'll walk away if the shutdown continues.

Got it. Builds confidence. Then days 9 and 10 are negotiation. The sources had a really smart tactic here to get the seller aligned with the whole close now refi later plan.

Yes, the refi triggered interest uplift. This is quite clever. You ask the seller to accept a slightly lower interest rate on their seller note initially making the deal more feasible for you with the temporary expensive debt in the stack. But you write into the agreement that the moment you successfully refinance that seller note using cheaper SBA money later on, the interest rate on the remaining balance of their note bumps up. Or maybe they get a small bonus payment.

Ah, so they benefit directly when you refinance.

Exactly. It Aligns their incentives perfectly with yours. They want you to close fast now, and they also want you to succeed in refinancing later because it means more money for them. It turns the temporary structure into a potential win win.

That's a really practical way to bridge that gap. Okay, so wrapping this up, what's the core takeaway for listeners navigating this? It seems the main message is pretty clear. This shutdown, while disruptive, creates a temporary market condition, that liquidity shock. And in this environment, momentum is everything. Sitting on the sidelines waiting is likely the riskiest move. And we have to hammer home that Q effect one last time. If you do wait, be prepared for chaos. When the SBA reopens, lenders will be overwhelmed. Sellers who held off might suddenly have multiple offers, likely less favorable terms for buyers. That temporary pricing or structural advantage we talked about, it'll probably evaporate almost instantly.

It will compress very quickly. Acting now isn't just about maybe getting a slightly better deal. It's about securing the asset and your position before that bottleneck hits. And if you really want to sharpen your focus on where that reopening pressure will be most intense, you need to look at the state level SBA data. The sources pointed this out, right?

The geographical concentration.

Yeah, we know the blockages are huge in specific states. California, for example, sees something like $126 million in SBA loans frozen per week. Texas is around $88 million blocked, per wit. So think about that. If you're a buyer or even a seller in one of those high volume states, what does that tell you about the explosion of activity, the sheer competition for lender attention and good deals that's going to happen the instant the SBA gates reopen?

It'll be intense.

Extremely. How does knowing about that specific localized backlog influence how fast you need to move? Right now, that geographical pressure is real and it should absolutely inform the urgency of your current strategy. Something to definitely ponder as you plan your next move.

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