Small Business Loans - SBA Commercial Loans


sba mortgages 504 and 7a

The Small Business Administration (SBA) was created in 1953 as an independent agency of the US government to protect the interests of small businesses, preserve competitive enterprise, and strengthen the economy. The SBA helps small business owners remain the engine of the United States by offering higher LTVs and lower DSCRs than most conventional loan products. These programs are operated through private-sector lenders that provide loans which are, in turn, guaranteed by the SBA; the Agency has no funds for direct lending or grants. Although these programs are available for any individual, it gives special advantages to women and those belonging to minority groups. These products are available nationwide.


Loan Type *Property Type Min Loan Amount Max LTV Term Length Amortization Rates
SBA H/M, I/W, M/H, MU, O, R, SS $1,000,000 85 - 90% 5-15 Years 15-30 Years
H/M = Hotel/Motel I/W = Industrial/Warehouse M/H = Medical/Healthcare MU = Mixed Use O = Office R = Retail SS= Self-Storage

Table of Contents

SBA Loan Features

Term Length and Amortization: SBA term length and amortization depends on the product as well as the underwriting guidelines of the conventional partner. Terms and amortizations can go up to 25 years in some circumstances.

Recourse: SBA Loans are always recourse, which means that a personal guaranty for the repayment of the loan is required. Full recourse loans make the sponsors guarantying the loan responsible for any and all shortfalls between the loan balance and sales price in the event of default and foreclosure as well as any applicable legal and ancillary fees.

Prepayment Penalty: Prepayment structures can vary greatly, depending on the how the conventional partner structures the loan and what SBA program is guarantying the loan.

Lending Areas: SBA loans are nationwide.

Loan Servicing: SBA Loans are typically serviced by the Certified Development Company (CDC) packaging the loan. The Master Servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for preforming customary work-out related duties including extending maturity dates, restructuring loans, appointing receivers, foreclosing the lender’s interest in a secured property, managing the foreclosed real estate and selling the real estate. Under some situations, master servicers subcontract some of their responsibilities to a primary or sub servicer in order to uphold the servicing standard when they need additional assistance.

SBA Loan Types

  1. SBA 7a loans are the most basic and most used type loan of SBA's business loan programs. Its name comes from section 7a of the Small Business Administration Act, which authorizes the Agency to provide business loans to American small businesses. SBA 7a loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7a loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default.
  2. The SBA 504 Loan Program Is one of the best financing vehicles available for new and expanding businesses. With up to 90% loan-to-cost available under SBA 504 loans, owners of small and mid-sized businesses can preserve capital and maximize cash flow to better afford purchasing commercial real estate instead of leasing. Our borrowers get real estate financing with less money down, longer fixed rate terms, and great customer service and turn around times from Commercial Loan Direct.

SBA 504 Eligibility

  • Operate as a for-profit company
  • Do business (or propose to) in the United States or its possessions
  • Has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.
  • Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
  • Be an eligible type of business. While the vast majority of businesses are eligible for financial assistance from the SBA 504 program, some are not. Check this list of eligible and ineligible types of businesses to see if your company qualifies.
  • Under the 504 Program, Plan to use proceeds for an approved purpose. CDC/504 loan proceeds may be used for the financing of fixed assets like real estate or equipment. This list explains Eligible and Ineligible Use of Proceeds.
  • Not have funds available from other sources. SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds.
  • Ability to repay the loan on time from the projected operating cash flow of the business
  • Good character. SBA 504 obtains a "Statement of Personal History" from the principals of each applicant firm to determine if they have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community
  • Relevant management expertise
  • Feasible business plan

SBA 504 Use of Proceeds

Uses

  • The purchase of land, including existing buildings
  • The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
  • The construction of new facilities or modernizing, renovating or converting existing facilities
  • The purchase of long-term machinery and equipment

Illegal Uses

  • Working capital or inventory
  • Consolidating, repaying or refinancing debt
  • Speculation or investment in rental real estate

SBA 504 Interest Rates, Fees, and Loan Amounts

Loan Amounts

Job Creation - The maximum SBA debenture is $5 million for meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal (see below).

Public Policy - The maximum SBA debenture is $5 million or $5.5 for small manufacturing or when meeting the public policy goals of energy reduction or alternative fuelsl. Examples of public policy goals include:

  • Business district revitalization
  • Expansion of exports
  • Expansion of minority business development
  • Rural development
  • Increasing productivity and competitiveness
  • Restructuring because of federally mandated standards or policies
  • Changes necessitated by federal budget cutbacks
  • Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
  • Expansion of small business concerns owned and controlled by women

Small Manufacturing - The maximum debenture for small manufacturers is $4 million. A small manufacturer is defined as a company that has its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and all of its production facilities located in the United States. To qualify for a $4 million 504 loan, your business must meet the definition of a small manufacturer and accomplish one of the following:

  • Create or retain at least one job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)]
  • Improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act]

Other Terms

Collateral- Generally, the project assets being financed are used as collateral. Personal guarantees of the principal owners are also required.

Maturity Terms- Maturity terms of 10 and 20 years are available.

Interest Rates- Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues.

SBA 504 FAQS

  • SBA loans for healthy expanding businesses.
  • Loan fixed rate below market financing.
  • Financing for fixed assets: real estate, machinery and equipment.
  • SBA 504 loan term of 20 years for real estate, 10 years for machinery and equipment.
  • Down payment requirement of only 10% or more for customer.
  • Lender/Bank can provide 90% financing for customer.
  • Lender/Bank can participate in larger transactions.
  • Lender/Bank enjoys first lien, lending 50% of value at market rate and fees.
  • For profit businesses.
  • Tangible net worth not to exceed $8.5 million.
  • Net profit after taxes not to exceed $3 million during previous 2 years.
  • Purchase land, purchase or construct building.
  • Modernize, renovate or improve building.
  • Purchase machinery and equipment with 10 year useful life.
  • Soft costs and/or closing costs.
  • Total project size $125,000 minimum.
  • No maximum total project size.
  • Non-profits.
  • Speculative development.
  • Lending institutions, insurance companies.
  • Gambling concerns and private clubs.
  • Refinancing.
  • Working capital.
  • Inventory.
  • Rolling stock.

What is the SBA 504 Loan Product?

5 or 10 year treasury bond rate plus approximately 210 basis points.

  • 50% Lender/Bank in 1st Lien
  • 40% 504 in 2nd Lien
  • 10% Equity
  • Start-up or Special Purpose Building will require 15% equity.
  • Start-up and Special Purpose Building will require 20% equity.
  • Minimum 10 year term on real estate, minimum 7 year term on machinery and equipment.
  • Market rat and fees.
  • Covenants established by lender.
  • One time 1/2% fee to SBA on Lender's participation.
  • Debenture Fees: 2.65% of 504 loan.
  • All of the fees can be financed.
  • Personal guarantee by 20% or greater owner.
  • CHANGE 1 - The combined loan amount has been increased to $10 Million
  • CHANGE 3 - Refinances under 504 were previously ineligible. That has been amended.
  • CHANGE 3 - To create liquidity and allow banks to lend, the SBA will guaranty up to $3 billion for 504 first mortgage pools to be sold.

SBA 7a Eligibility

SBA 7a Use of Proceeds

Uses

SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible. However, there are some universally applicable requirements. To be eligible for assistance, businesses must:

Illegal Uses

SBA 7a Repayment Terms

Amortization

Most 7(a) term loans are repaid with monthly payments of principal and interest. For fixed-rate loans, the payments stay the same because the interest rate is constant, whereas for variable rate loans the lender can require a different payment amount when the interest rate changes. Applicants can request that the lender establish the loan with interest-only payments during the start-up and expansion phases (when eligible) to allow the business time to generate income before it starts making full loan payments. Balloon payments or call provisions are not allowed on any 7(a) loan except SBA Express loans. The lender may not charge a prepayment penalty if the loan is paid off before maturity, but the SBA will charge the borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years.

Collateral

The SBA expects every 7(a) loan to be fully secured, but the SBA will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. This means every SBA loan is to be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets have been pledged (to the extent that they are reasonably available). Personal guarantees are required from all owners of 20 percent or more of the equity of the business, and lenders can require personal guarantees of owners with less than 20 percent ownership. Liens on personal assets of the principals may be required.

SBA 7a Interest Rates, Fees, and Loan Amounts

SBA 7a Interest Rates, Fees, and Loan Amounts

Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan's maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds. On loans under $150,000 made after October 1, 2013, the fees will be set at zero percent. On any loan greater than $150,000 with a maturity of one year or shorter, the fee is 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year, the normal fee is 3 percent of the SBA-guaranteed portion on loans of $150,000 to $700,000, and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.

Interest Rates

The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate and an allowable spread. There are three acceptable base rates (A prime rate published in a daily national newspaper*, London Interbank One Month Prime plus 3 percent and an SBA Peg Rate). Lenders are allowed to add an additional spread to the base rate to arrive at the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25 percent. For loans with maturities of seven years or more, the maximum spread will be 2.75 percent. The spread on loans of less than $50,000 and loans processed through Express procedures have higher maximums.

Percentage of Guarantee

SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. SBA's maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000 or 75%. SBA Express loans have a maximum guarantee set at 50 percent.

SBA 7a Checklist

  1. Personal Background and Financial Statement - To assess your eligibility, the SBA also requires you complete the following forms:
    • Statement of Personal History - SBA Form 912
    • Personal Financial Statement - SBA Form 413
  2. Business Financial Statements - To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
    • Profit and Loss (P&L) Statement - This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
    • Projected Financial Statements - Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
  3. Ownership and Affiliations - Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
  4. Business Certificate/License - Your original business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
  5. Loan Application History - Include records of any loans you may have applied for in the past.
  6. Income Tax Returns - Include signed personal and business federal income tax returns of your business' principals for previous three years.
  7. Resumes - Include personal resumes for each principal.
  8. Business Overview and History - Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
  9. Business Lease - Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
  10. If You are Purchasing an Existing Business - The following information is needed for purchasing an existing business:
    • Current balance sheet and P&L statement of business to be purchased
    • Previous two years federal income tax returns of the business
    • Proposed Bill of Sale including Terms of Sale

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