Do you want to open a new franchise and need
financing to do it?
Do you want to expand your existing business by opening a new
location?
Do you want to refinance your business debt & lower your monthly
overhead?
Are you tired of paying rent to a landlord? Do you want to own
the real estate where you operate your business?
If you answered “yes” to any of these questions, the Small
Business Administration (SBA) 7(a) loan may be your answer. This
national loan program designed by the federal government is offered
by many national lenders can be used for a wide variety of business
purposes. The SBA offers loan guarantees ranging from 50% up to 90%
of the loan amount to reduce the lender’s risk which, in turn,
makes securing an approval more likely. The following information
is being provided in outline form to simplify understanding the
qualifications and the variety of uses for this flexible loan
program.
The SBA 7(a) Loan Program’s Four (4) Main Uses
1. Finance a Start -up Business
- The SBA 7(a) Loan will finance up to 80% of the total project
costs which typically includes the equipment needed to operate your
business, organization costs, location buildout, deposits,
inventory, operating working capital and franchise fees.
- The owners’ equity injection is typically at least 20% of the
total project costs and cannot be borrowed money such as a home
equity loan.
- The borrowers must provide their resume(s) demonstrating
industry experience, transferable management skills and/or related
education
2. Finance the Expansion of an Existing Businesses
- Same list as a startup business above
- Business tax returns must be able to support the new debt.
3. Debt Consolidation for an Existing Business
- The funds from the loan are used to refinance existing business
debt which can include existing equipment leases and loans of all
types.
- The refinancing can include existing credit card debt only if
the debt was incurred for business purposes and can be easily
identified as business debt.
- The resulting monthly payment must reduce the total monthly
payments of all debt being consolidated by 10%.
Common Criteria, Terms and Conditions for the Three (3) Uses
Listed Above
- The collateral for the loan is all business assets.
- Addition collateral is often required which is typically
residential real estate only up to the loan $ amount.
- Good personal credit typically 675 credit score or above
- 10-year loan repayment term
- Prepayment penalties typically range from 1-4% over the initial
term period
- The interest rate is typically prime rate as published in the
Wall Street Journal (4.25%) plus a risk premium typically 2.75% =
7%.
- Closing Costs are approximately 3% of loan amount and are
usually added to the loan amount.
- Timing to close - 90 days which varies with the bank work load
& the responsiveness of the borrower. Real Estate – Commercial
Mortgages
- The SBA loan will finance up to 90% of the real estate
acquisition cost.
- The owners’ equity injections is typically 10% of the
acquisition cost of the real estate and cannot be borrowed money
such as a home equity loan.
- The business must occupy at least 50% of the useable space
which provides an opportunity to lease out up to 49% of the useable
space.
- Terms and Conditions:
- The collateral is real estate being purchased
- Good personal credit typically 675 credit score or above
- Loan Repayment Term ranges from 20-25 years
- Fully amortized loan with no balloon payment
- Prepayment penalties – range from 1-4% over the initial term
period
- Interest Rate – Prime (4.25%) plus a risk premium of no more
than 2.75%. The risk premium will vary based up the appraisal and
the strength of the borrower.
- Closing Cost – Typically 3% of loan amount added to the amount
financed at closing Timing to close - 90 days. Varies with bank
work load, time for real estate appraisal & borrower
responsiveness.
- Timing to close - 90 days which varies with the bank work load
& the responsiveness of the borrower.
Conclusion
There are many benefits of the SBA 7(a) program to finance your
business. You will have only one monthly debt payment amortized
over the longest repayment term available with no significant
prepayment penalty. The use of funds is nearly unlimited to any
legitimate business purpose. Since the SBA 7(a) loan is backed by
the federal government, it offers the lowest APR available.
Consequently, we recommend you strongly consider this form of
financing for the wide variety of uses that this flexible loan
product offers for business financing.