It shouldn’t come as a surprise that SBA loans are a hot commodity these days. With the recent introduction of the SBA’s Economic Injury Disaster Loan program and the Paycheck Protection Program, it seems there are (at this moment) a variety of options for business owners to choose from to obtain financing.
But what if you’re not looking for assistance, and instead are seeking financing to grow your business or acquire a building for your business location? The SBA has several options for small business owners and entrepreneurs to choose from, but like many other forms of business loans, the process can seem daunting and a bit overwhelming.
But, fear not. At Business Finance Capital, we’re here to help—even if it means recommending you pursue a loan that isn’t the kind we specialize in—the SBA 504 Loan Program. Here are a few quick tips to help sort through the noise and make the right choice to meet your financing objectives.
Tip 1: Study your options and determine your current financial situation
The more you know about your business, the better you’ll be able to ascertain the right loan for your business, and/or prequalify for certain loan options. Keep in mind the three C’s of business lending – credit, cash flow and collateral:
Credit refers to your history of paying your debts on time; cash flow is the measure of your company’s financial health (annual revenues minus annual expenses) and demonstrates your ability to repay the loan; and collateral refers to your assets available to pledge for the loan. Be prepared to address these three C’s with your lender.
Tip 2: Know what your business needs are and what the loan will be used for
Different SBA loans cater to different financial needs. Case in point, the SBA 504 is generally used for the refinance/purchase of owner-occupied commercial real estate, construction and fixed-asset equipment.
504 Loan Program
The SBA 504 program provides financing for 51% or greater owner-occupied commercial real estate, whether for a purchase or refinance. Down payment for a purchase is just 10%. A bank, or non-bank lender, provides 50% of the financing in the form of a 1st mortgage and the 40% 2nd mortgage portion is funded by private and institutional Wall Street investors which is government guaranteed. For a refinance, the structure would be 50%/50% as the equity in the project counts as the 10% injection.
There is no project size limit to the program; although the maximum SBA 504 loan, per project, is limited to $5 Million, or $5.5 Million for manufacturers or energy-efficient projects.
The SBA 504 program also finances fixed-asset equipment and machinery.
7(a) Loan Program
The SBA 7(a) program provides financing for 51% or greater owner-occupied commercial real estate, working capital, expansion, equipment financing and shareholder buyouts/business acquisitions, among other uses.
Real estate loans are fully amortizing over 25 years and all other uses are fully amortizing as well, typically over 10 years. Down payment for a building purchase is just 10%.
A bank, or non-bank lender, provides all of the required capital which comes with a government guarantee to the lender.
Federally guaranteed term loans of up to $5 million.
- Loans of up to $50,000.
- Funds for working capital, inventory, equipment, starting a business.
- Processed through community-based nonprofits.
SBA Disaster Loans
- Loans of up to $2 million.
- Funds for small-business owners affected by natural disasters and other emergencies.
- Processed through the SBA.
Senior Vice President, Business Development Officer