Studies show that for many businesses, owning their real estate is a sound investment that brings stability and financial success. The challenge is how to do so.For many, one of two programs offered by the U.S. Small Business Administration – the 504 program and the 7a program – can be the solution. In fact, 98% of U.S. businesses meet these SBA programs’ eligibility requirements:
- Be “for profit”
- Have a net worth of less than $15 Million
- Have an average net income after taxes over the last two years of less than $5 Million
What makes these programs invaluable when buying, building or remodeling commercial buildings is that they enable business owners to minimize the cost of owning their real estate.
A key benefit of the SBA programs is the low down payment—10 or 15 percent, depending on the type of property compared to the 20 to 30 or more that non-SBA lenders typically require. Also, the SBA program provides up to a 25-year term on real estate loans. The lower down payment minimizes the initial cash outlay, while the longer term reduces the monthly payment.
Not as complicated as people think.
One of the most often heard objections to the SBA programs is that the loans require too much paperwork. The truth is that there are only two forms that separate an SBA loan from a conventional or non-SBA loan.
Another objection heard is that the SBA process takes too long. This may be true if the lender lacks SBA experience. But if the lender is an SBA Preferred Lender, or PLP, there should not be a material time difference in the time it takes to obtain approval for and close an SBA versus a conventional loan. If there is a significant time delay, then the borrower should consider moving the request to another lender who can provide a timely response. PLP lenders, who earn such status by demonstrating to the SBA their mastery of program rules, have in essence delegated authority from SBA to extend the SBA’s guaranty. We have been a PLP Lender for over 5 years.
Here are some details on each of the SBA programs:
The 504 program is primarily for the acquisition of commercial property. The classic structure under this program is 50/40/10: The small business makes a 10 percent down payment; the SBA funds 40 percent of the loan through a sale of a debenture; and the bank funds 50 percent. The benefits to the small business are that the SBA debenture interest rate is fixed for 20 years and, of course, the 10 percent down payment.
The 7a program can support the following business purposes:
- Acquiring commercial real estate
- Remodeling of commercial real estate
- Expanding commercial real estate
- Acquiring equipment
- Acquiring inventory
- Acquiring furniture and fixtures
- Refinancing debt
- Working capital
The 7a program is very flexible, which accounts for its popularity. Proceeds can be for one or a combination of uses. For example, consider a manufacturer who needs to buy a new building to accommodate his growth. That manufacturer could very well also need to modify the building for his use, buy new equipment to improve production and have working capital to bridge the period between closing the old plant and moving into the new one. All these needs can be financed within one SBA 7a loan. Generally, down payments mirror the real estate requirements under the 504.
The 7a program’s simplicity is pretty attractive, but it does have some caveats. First, the interest rate at most banks is not fixed. Second, SBA does not fund any portion of the loan. The bank funds 100 percent of the loan amount and receives a guaranty ranging from 75 to 85 percent of the loan.
Consider your options
Our lender can help you select the best SBA program for your unique needs. Call and discuss your situation with them today.
As an alternative, we have established a preliminary qualification procedure to quickly assess your particular situation. The process results in a proposal letter within 48 hours of submitting requested documentation. The proposal letter details all potential terms and conditions for your loan including interest rate, term, insurance requirements, estimated closing costs, etc. Please see Preliminary Qualification page for details.