SBA or Small Business Administration provides loans, loan guarantees, contracts and counseling, along with other forms of assistance to small businesses since its founding in 1953. If you don’t mind the paperwork and work with a SBA preferred lender, the process can be a bit smoother than anticipated.
For startup businesses, especially ones where Real Estate is being acquired, or for someone looking to acquire an existing business, SBA loans may be worth the time and effort. Current rates vary of course, but in MOST CASES the maximum current rate are PRIME +225 bps, or approximately 5.50% (you can lock in a fixed rate as well depending on loan type).
Besides the attractive rates, another nice feature of SBA loans are the terms they offer, again depending on the loan type can be anywhere from 10 to 25 years in length. The loans are fully amortized over the life of the loan and there are no balloon payments, or calls, so you lock in your rate for the term of the loan. I will discuss the two most common forms of SBA programs for small businesses but this month I will start with the most common SBA program for small business.
Purpose: Used for the purchase of commercial real estate, refinancing existing commercial real estate properties, new construction, and business acquisitions. Examples of business acquisitions included medical practices, accounting practices, law practices etc. The loans can also cover working capital needs and other business assets. SBA 7 (a) loans are also a common and cheaper form of financing for Franchise Owners both existing owners and new owners.
The maximum loan amount for the 7(a) program is $5,000,000 and the minimum is approximately $250,000. There are other SBA loan programs that cater to loan amounts down to $100,000 in size (sometimes even less).
7(a) loans usually close within 45 to 60 days of a signed commitment letter
Usually they are floating rate coupons where the PRIME rate is the index or benchmark. Currently the MAXIMUM interest rate amount is PRIME +225 bps (or approximately 5.50%). There are also certain SBA preferred lenders that will offer fixed rate loans as opposed to floating rate. Obviously the rates are subject to change at any time, but essentially they are very competitive.
10 to 25 yrs. based on the loan purpose, but no balloon payments or calls-they are fully amortized over the life of the loan. Generically speaking the loans tied to business acquisitions where Real Estate is involved is usually the ones that have longer terms, whereas the restaurant owner is usually the one given the shorter term if there is no real estate involved. There are always exceptions, but generally where Real Estate is involved the terms are longer.
There is a prepayment penalty but they decline over the 3yrs for loans with terms of 15yrs or more.
No loan origination fee. One time SBA loan guarantee fee based on loan size. Usually there is a good faith deposit to be used for loan closing costs.
First lien on all assets being financed.
Personal guarantees for all individuals owning 20% or more, corporate guarantees of affiliated companies may be required.
Debt Service Coverage:
The more aggressive SBA lenders usually let you get away with a lower DSCR score, maybe around 1.25 times, figure 1.25 to 1.35 times debt service coverage to qualify.
All for profit businesses that meet SBA eligibility standards (eligible on SBA website but essentially no loan companies, life insurance companies, passive investments, foreign entities etc..)
Next month I will discuss another SBA program known as SBA 504 which is for larger loan amounts for larger businesses. BlueJacket Financial hopes everyone had a happy and safe Fourth of July and wishes all a great rest of the summer.
The Small Business Finance blog is graciously written by Francis Kestler of BlueJacket Financial on behalf of the Wicker Park Bucktown Chamber of Commerce.