Since many businesses have a track record and good relationship with a conventional bank lender, SBA financing may not be appropriate for them. The business owner who will benefit from SBA financing may have lost their long-term banking relationship. When shopping for a new lender, they may find bank financing requiring a large down payment such as 30%, or the bank may require excess collateral for the loan, or they offer only short-term financing instead of a 25-year loan offered through the SBA program. Because most SBA loans have a variable rate of interest tied to changes in the Wall Street Journal Prime Rate, some borrowers will fear the interest rate risk. What they do not contemplate is that the conventional bank loan is typically a short-term loan for three years or five years, and they will once again have interest rate risk at that time.
Also, with a short-term bank loan, there is renewal risk. A business owner cannot assume their bank will renew their loan at maturity. That is not always the case! If the business is experiencing any declining trends in revenue at the time for renewal, they might be denied for credit risk. If the bank changed ownership or management, they might be denied for new policy reasons. The typical SBA real estate borrower is one who justifies the interest rate risk with other advantages in the loan structure. These include factoring in changes in the interest rate to feel confident the payments are manageable even with interest rate increases.
The business owner may also be comforted by knowing the SBA government backed loan got them into property ownership with much less down payment which preserves cash for the business. Additional comfort comes from knowing the loan will stay in place for 25 years if needed. Finally, an SBA loan allows them to enjoy ownership while establishing a payment track record on the SBA loan. This could help them qualify for more attractive refinancing terms after two or three years. The SBA 7(a) loan has prepayment penalties only for the first three years. The business owner can still pay ahead on the loan principal up to 25% of the loan balance in each of the first three years while prepayment penalties exist, without incurring the penalty.
Another advantage of an SBA real estate loan includes being able to finance loan closing costs and other business needs such as financing for working capital, new business equipment, and debt consolidation. Once again, since this is a business loan, rather than a pure real estate loan, the use of loan proceeds can be flexible. In summary, any business owner needing to borrow up to $5 million for small business real estate should investigate all options including SBA financing. With SBA financing, we have happy borrowers who found a way to own their real estate and control their destiny when other financing options did not work for them.
Published November 2018