The answer to this question isn’t right or wrong. It is a matter of what is better for you. “Conventional” financing is typically defined as a bank loan that is not guaranteed by the SBA (Small Business Administration). While terms are always negotiable with lending institutions, the primary advantage of using this type of financing is that it allows you to avoid paying SBA fees. Hence, the question becomes…Is it worth the fees to get an SBA loan instead of a conventional loan? While the SBA offers several programs, the two most popular are the “504 Program” and the “7 (a) Program”. Here are some of the benefits for both programs. (**Always consult the proper professional before taking action.)
SBA 504 Program:
1. Ninety percent (90%) financing of the total project costs are available for commercial real
estate purchases. Using the 504 allows business owners to keep more in cash reserves and creates the opportunity to make a higher cash-on-cash returns.
2. Longer loan amortizations allow for smaller monthly payments. Additionally, prepayments are allowed (generally up to 20% of the principal balance during the first ten years), so business owners can have the best of both worlds — smaller monthly payments for when cash flow is tight and the ability to pay down debt when excess cash allows it. Maximum loan amortization is 25 years for real estate.
3. When properly structured, owning commercial real estate instead of leasing can (doesn’t guarantee) give you more control over you annual occupancy costs. Once the mortgage cost is covered, you can adjust the “rent expense” to fit your needs more closely.
4. Financing closing and other soft costs with a 504 loan helps reduce out-of pocket
expenses when business owners make the decision to purchase commercial property and only want to spend the minimum amount of cash necessary.
5. The lack of balloon payments, calls or negative loan covenants enable borrowers to
enjoy control and peace of mind with less lender micro-management.
6. When well-organized, borrowers and lenders can close in as little as 45 days allowing the business owner to take possession of their new property as soon as possible.
7. When dealing with a genuine specialist in 504 financing, the experience of buying commercial property can be simple and far less stressful than working with non-specialists. Some specialists can provide twenty-four hour preapprovals and four day commitments once they receive the necessary information from the borrower.
8. Future sales of properties financed by our 504 loans are benefited by having assumable mortgages at today’s historically low interest rates.
SBA 7 (a) Program:
1. The 7 (a) program can be used to secure loans expansion or renovation, construction of a
new facility, purchase of land or buildings, purchase of equipment, fixtures, or leasehold improvements, working capital, refinancing debt for compelling reasons, a seasonal line of credit, acquiring inventory or any legal business expense. For many borrowers, these loans are harder to secure when the bank does not have the SBA guaranty for the loan.
2. The 7(a) can provide a maximum guarantee of $750,000 or 75% of the total loan whichever is less.
3. For loans of less than $100,000, the guarantee is normally 80%.
4. The guarantee is use to encourage lenders that might not otherwise make the loan. The SBA guaranty assures the lender that if the borrower does not repay the loan, the Government will reimburse the lender for its loss, up to the percentage of SBA’s guaranty. Note that the borrower still remains responsible for repaying the full outstanding amount of the loan.
5. The specific terms of SBA loans are negotiated between the borrower and the participating lender subject to the requirements of SBA.
6. 7(a) loans have a maximum loan amount of $2 million.
7. Maximum loan amortization is 25 years for equipment and 10 years for working capital and inventory loans.
8. Interest rates are negotiated between the borrower and the lender but are subject to SBA
maximums which are pegged to the prime rate, the LIBOR rate, or an optional peg rate.
Interest rates may be fixed or variable.
(Legal Disclaimer: Always consult the proper professionals before taking action. By and before the use of the information provided herein, reader agrees that BFS® is not responsible for viewer’s actions related to said information.)