Small business administration (SBA) guaranteed loans are an excellent resource for small businesses to obtain favorable loans for both leasing and to finance commercial real estate for owner occupants. What many people are unfamiliar with related to the SBA loan programs is that there are two programs in which small businesses may be eligible to participate for the finance of commercial real estate. Before considering which program to consider in obtaining financing, the first key in obtaining a SBA guaranteed loan is understanding the general eligibility requirements for the loan programs available.
- Know the SBA guaranteed loan eligibility requirements:
- Your business must be a for profit business. Nonprofits are not eligible
- Your business must be considered a small business by the SBA. In order to do this you must have a tangible net worth of less than $15 million and have a net average income for each of the previous two years of less than $5 million
- You must be doing business in the US
- You should show you will be creating or maintaining jobs
- You must have a reasonable amount of equity in your business.
- You must demonstrate a need for the loan proceeds and have a sound business purpose for the funds.
- You must demonstrate that you are unable to get a similar loan elsewhere.
- Finally, you cannot be delinquent on any existing debt obligations to the US government
- Understand the loan programs available:
- The SBA 504 program is designed financing fixed assets for healthy, growing businesses. This includes 51% plus owner occupied real estate or machinery and equipment. The program allows for a typical down payment of only 10% on long-term loans. Loan amounts can range from between $200,000 up to $20 million or more.
- The SBA 7(a) can also be used to purchase commercial real estate, assist in the acquisition, operation or expansion of existing business. They can also be to purchase equipment, machinery, furniture, fixtures, supplies, materials, as working capital or occasionally to refinance existing business debt. It can also use be used for tenant improvements on leased properties. The maximum loan amount is $5 million. In 2012 the average loan was $337,000.
- Finding a lender: Work with a SBA Preferred Lender. These are lenders have the most experience in working with the SBA and in most cases have the ability to make SBA guaranteed loans on their own, based upon their own review, without the SBA reviewing the application. All they need to do is get an assignment of loan number from the SBA. You can find a list of preferred lenders online.
- Qualifying for a loan: Many borrowers who would technically not qualify for a conventional loan, which may require 20-25% down to purchase Commercial Real Estate, may very well may qualify for a SBA 7(a) or 504 loan with only 10% down, if the down payment is an issue for the borrower in obtaining a conventional loan. The lenders use their same lending criteria with the SBA guaranteed loans as they do with their own loans. So, there are still hoops to jump through and you need to show that you can pay the loan back. It is actually the lender making the loan, not the SBA. The guarantee by the SBA allows for better loan terms and lower risk to the lenders.
- Prepayment penalties: SBA guaranteed loans have a declining 10 year prepayment penalty built-in to the 504 program guaranteed loans. Currently it is 2.52% during the first year and then declines by 10% each year after that. The 7(a) has a 3 year declining prepayment penalty: 5 % year 1, 3% year 2 and 1% year 3 on loans over 15 years.
These are the basic keys to obtaining a SBA guaranteed loan to finance commercial real estate. There are many more details that have to dealt with, another good reason to work with a preferred lender. While much of this may seem complicated to many of us, most of the preferred lenders have loan officers who only work on SBA guaranteed loans and can simplify the process significantly for applicants.