Basics of SBA Lending

December 18, 2020|
ROCBILT Commercial Lending|
Blog|

What is an SBA Loan?

An SBA loan is a business loan that is guaranteed by the U.S. Small Business Administration (SBA). An SBA loan is often used for small business expansion. Small business owners can use these funds in a multitude of ways with the aim of business growth through the SBA 7(a) or through the loan SBA 504 program.

The Small Business Administration guarantees a portion of a loan that is acquired through an SBA approved lender. There are two main SBA funding programs. SBA 7(a) and SBA 504.

SBA loans typically can range from around $150,000 up to $15,000,000. The term of the loans can also range from 5 years to 25 years depending on the use of proceeds. The interest rates on SBA loans can be anywhere from mid 3% range to the low 8% range, depending on numerous factors.

Why choose an SBA Loan?

There are a number of reasons for taking out an SBA loan for your business. An SBA loan has affordable interest rates, requires a smaller down payment than conventional lending, has favorable repayment terms, and can be used for many different purposes. However, to take advantage of the benefits of an SBA loan, you need to know who qualifies for an SBA loan and the differences between each SBA loan program.

When you consult with ROCBILT Commercial Lending, we look at your unique business situation and help you understand the option the SBA offers and which would be best for your needs as a business owner. You are a person, a business owner with a story to tell that we listen to in order to find the best SBA option for you.

Each lender will have their own terms for SBA loans and their requirement for money down, reserves, collateral and documentation will vary. Some banks and non-bank SBA lenders have changed their lending parameters because of the COVID crisis in order to reduce their risk. For example, although SBA requires just 10-15% down payment typically, many lenders are now requiring as much as 20% down or even 25% down in certain industries such as hospitality. When you come to us for an SBA loan, we are very familiar with the current climate in SBA lending and the tolerance of the lending sources. We work to help you navigate your options and will choose the best fit for your particular business.

Applying for a SBA Loan

SBA loans are somewhat easier to qualify for than conventional lending. SBA will work with “blue sky” which is lack of collateral. SBA loans will give credit for “good will” whereas conventional loans will not recognize “good will” or the value of the business. The SBA 7(a) loan program is a very good fit for leasehold properties where the business does not own the real estate but leases a space for the business.

Qualifying for an SBA loan doesn’t have to be an elaborate and time–consuming process. The application process for an SBA loan can seem overwhelming, but if you choose the right loan consultant, they will be able to seamlessly walk you through the process.

One of the main determining factors, as with most financing, will be your personal credit score. Most business owners who qualify have a credit score of 650, and have been in operation for over three years, but there are many exceptions to these. SBA will do start-up businesses but they’ll want the applicant to have experience in the business being proposed and will often require a larger down-payment on start-up ventures.

You’ll need to fill out and submit the required documentation including personal financial statements, description of the collateral, a business description, proforma projections and an outline of how you plan to spend the loan among other documents.

The lender offering the loan will want to see a business with a solid credit history, a sound business plan, a business that has been profitable for its recent existence and an ability to repay the loan.

Choosing the correct SBA Loan for your business

There are a variety of loan funding programs offered by the SBA but the two most popular programs and the loans we offer are:

The SBA 7(a) Loan Program (general financing needs)
The SBA 504 Loan Program (owner occupied commercial real estate and/or heavy equipment)

The SBA loan you qualify for will depend on several factors, mainly about the use of proceeds.

SBA 7(a) Loan Program

The 7(a) program is the most popular among the SBA loan programs. This is because the loan can cover most general financing needs. Needs like working capital, paying off old debt obligations and renovating the business premises are the main reasons for applying for a SBA 7(a) loan.

SBA 7(a) loan terms include:

A maximum loan amount of $5 million.
Repayment periods of up to 10 years for working capital loans or up to 25 years for commercial real estate loans.
To be used for general financing needs

The 504 Loan Program

The 504 Loan Program is much more specific than the 7(a) program. You use the 504 loan to buy major fixed assets, owner occupied commercial real estate and/or heavy equipment.

The terms of an SBA 504 loan are as follows:

Generally up to $15 million
Repayment period of 10 to 20 years
To be specifically used to buy fixed assets such as real estate or equipment

SBA Loans Cost

One of the most pertinent questions you should ask before applying for an SBA loan is, “how much will it cost?” The answer to that question will depend on the type of SBA loan that you choose.

Simply put, an SBA loan is the cheapest source of financing available to small business owners. The SBA decides the maximum amount that can be charged on any of their loans.

The two popular SBA loan programs both have different fees, repayment terms and interest rates as we will see below:

SBA 7(a) Loan Program Fees

Fees

The SBA charges a fee for providing additional security for the loan, known as the guarantee fee. Though the lender usually pays the guarantee fee, they can pass it along to the borrower as an expense of the loan.

They charge a guarantee fee of 1.7% of the loan amount for loans up to $150,000, 2.25% for loans between $150,000 and $700,000, and 2.625% on loans exceeding $700,000. For loans over $1.333 million, the fee increases slightly based on the loan amount. We can calculate the exact fee for you.

Depending on the lender from which you acquire the loan, you may be liable to pay an origination fee or loan packaging fee. The fees may seem like a burden but they are insignificant compared to the burden a smaller, faster to process but much more expensive loan would be.

Interest rates

SBA 7(a) loans come with either a fixed or variable interest rate which is usually adjusted every quarter. The lender that finances your loan will be the one to decide which to offer.

The SBA has a cap on the spread a lender is allowed to place above the loan’s base interest rate, minimizing how much profit the bank can make off your SBA loan. This protects you as a borrower.

If your loan amount exceeds $50,000 and the repayment period is less than 7 years, the loan’s interest rate will be determined by the Prime Rate and the maximum allowed spread on the rate is 2.25%.

If your SBA loan is more than $50,000 and has a repayment period of more than 7 years, the loan’s interest rate will be determined by the Wall Street Journal Prime Rate and the maximum allowable spread will be 2.75%. Understand that the interest rate on an SBA loan is also determined by your credit history and the repayment terms.

Repayment

The repayment terms of an SBA 7(a) loan are the best you will find in the market. You should expect to make monthly payments for 25 years if you acquire a commercial real estate loan, and 10 years for equipment loans or working capital loans.

SBA 504 Loan Program Fees

Interest rate

You should expect an interest rate of 4%-5.5% on the loan. However, you will not know the exact interest rate on the loan until 45 days after acquiring the loan.

The reason for the complication arises from the fact that a 504 loan comprises of two separate loans. One is from the lender which makes up 50% of the total loan amount and the other loan is from the Certified Development Company (CDC) and makes up 30% to 40% of the total loan amount. The other 10%-20% comes from your down payment.

Repayment

The repayment terms for SBA 504 loans is 25 years.

SBA Loan Requirements

There are personal and business requirements that one needs to fulfill in order to qualify for an SBA loan. The actual requirements to qualify for the loan will be decided by the individual financial institution from which you acquire the loan.

A business should qualify for an SBA loan if they have been in operation for at least 3 years, have a good credit history, have not recently experienced any bankruptcies or foreclosures and have enough cash flow to make monthly payments on the loan for the entire duration of the loan. Startups will be considered depending on the lender, if you have a solid business plan and relevant experience in the industry which the business is operating.

The ability to come up with cash flow to make the monthly loan payments should be demonstrated using tax returns and financial statements from both the business and the owner. The business can not have any delinquencies or have defaulted on any government loans in the past to qualify.

To qualify for a commercial real estate loan through the SBA, the real estate needs to be majority owner-operated. This means that at least 51% of the square footage of the property you plan on purchasing or refinancing should be occupied by and used by your business to qualify for an SBA loan.

The business owner must be a US citizen or a legal permanent resident of the United States.

Required Documents

To qualify for an SBA loan, there are certain documents you’ll need to provide. You should have these documents ready before applying for the loan in person or online. The more readily available and easily retrievable your documents are, the faster you will move through the application process.

You can consult an accountant or tax attorney before compiling the necessary documentation. The following are the most requested documents when applying for an SBA loan:

Personal and Business Tax Returns

Most financial institutions will require business and personal income tax returns for the past few years, typically 3 years.

Personal Financial Statements

You will have to submit your personal financial statements if you own more than 20% of the business. The consultants at ROCBILT Commercial Lending can help you fill out your personal financial statement.

Profit and Loss Statements

Also called the ‘Income Statement,’ the profit and loss statement shows the company’s performance for the stated period. With the COVID pandemic, it is typical that lenders will want to see Profit and Loss statements from all of last year as well as the most recent month to date statements to compare your business’ financial situation pre-COVID and post-COVID.

Balance Sheet

The balance sheet is the statement of financial position for your business. Again, lenders will want to see Balance Sheet for 12 months of last year as well as month to date statements.

Collateral

You’ll be required to present documents proving ownership of the asset you will be putting up as collateral for the loan or the collateral that the loan will be used to purchase.