Business owners that are considering an SBA 7a loan will enjoy numerous advantages when compared to conventional bank financing.
Higher Leverage - SBA loans typically have down payments that are usually only 10% of the entire project costs. This can greatly lower your overall cash out-of-pocket. Conventional mortgages often have down payments of 20% or more. Conventional mortgages often do not finance the loan costs, where an SBA-guaranteed loan includes the 3rd party costs (appraisal, title, processing, etc. ) within the loan.
Longer Terms- 25 year amortization with fixed periods ranging from 3, 5, 7, 10 years and sometimes 25 years is available. Conventional mortgages often have maximum amortization schedules of 15 to 20 years which can make cash flow tight during slow periods. In addition fixed periods rarely exceed 5 years.
No Early Balloon Payment- SBA guaranteed loans are fully-amortizing, meaning that the pays off by the end the amortization period. So the borrower does not have to refinance their loan because of a balloon. Also no payable on demand clause, like most conventional mortgages have.
Below Market Prepayment Penalty- If the term is less than 15 years the borrower does not have a prepay. If the term is more than 15 years than it is a year 3 year prepay, compared to most that are over 5 years. In addition the borrower is allowed to pay up to 25% of the balance without incurring the prepayment penalty. The prepayment penalty is calculated on the amount that is in excess of 25% of the balance, and is 5% in the 1st year, 3% in the second year, and 1% in the third year. Compared to the typical 5% for 5 years or the 5% step down. So, the borrower could actually pay off the entire SBA loan in 3 years and would not have to pay the prepayment penalty.
No Ongoing Debt Service Requirements - Traditional banks often want to monitor a borrowers business financials on a monthly or quarterly basis (after loan closes) to make sure that the businesses cash flows are still sufficient to meet the minimum debt coverage ratios. If the business net income, does not fit the required ratio the bank normally holds the right to call the borrowers loan (Evan if the borrower is current). This monthly monitoring is not normally required on SBA loans.
If a Construction Loan, it's a One-time Close - Meaning that the borrower will only have to close one loan. In contrast, most construction loans are set up as 2 loans - first is the construction piece, than the borrower would need to secure a second loan (take out) to refinance the first. The borrower would normally be required to pay for a second set of 3rd party fees, etc. Without a second closing, the borrower begins the amortization schedule (repayment) after construction is completed. You only have to sign one set of documents, work with only one lender, and attend only one loan closing.
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He specializes in Commercial Real Estate Loans between $400,000 - $5,000,000. Offers unique loan programs such as Commercial Second Mortgages, Commercial 30 Year Fixed and 90% non SBA financing, Commercial Equity Lines. 248 885-8797 or at or commercial real estate loans and commercial loan brokers