Small Business Administration Loans (SBA)

Try getting anywhere near that percentage in a conventional commercial loan? You won’t get close! The reason small business administration lenders can offer this is that the loans are backed by a guarantee from the United States government that states upon default the government will reimburse the bank right now up to 90% of the loan amount. That is why SBA lenders are able to offer much higher loan-to-value (LTV) than you will ever get with conventional loans.

This is the part that a lot of small business owners overlook and could be the kiss of death for them. All conventional commercial loans have covenants. If you break a loan covenant it can put you in hot water with the bank and you may end up in default and eventually into special assets even if you have made all your payments on time every month.

Here are four examples of loan covenants in the conventional commercial marketplace that do not exist in the SBA world:

• Minimum Net Worth requirement equal to the loan amount
• Fixed Charge Coverage Ratio where you must adhere to a minimum cash-flow standard set by the lender that you will have to prove every quarter
• Minimum Liquidity Requirements where you must have a certain amount of
  cash-on-hand in the bank at all times
• Minimum Debt to Equity Ratio meaning you must adhere to a certain percentage set by the bank of what they see as an acceptable amount of what the company owes as opposed to what it owns

SBA loans are fully amortized over a 10 or 25-year loan schedule. Most conventional loan programs for small businesses balloon after 3-5 years and then you either have to renew the loan and go through the underwriting process again, move the loan somewhere else, or pay it off.

Most 10-year SBA loans do not have any pre-pay provisions at all. Most 25-year small business loans have only a 3-year pre-payment period.

You can roll all your closing costs into the loan itself. Example: appraisal fee, environmental fees, attorney fees, title fees, and any other miscellaneous fees. Also, any fees you pay count toward your equity infusion in the small business loan which does not happen in conventional financing.

Collect all pertinent documents you will need for the initial underwriting of the loan. These would include business and personal tax returns for the last three years, current year Profit and Loss and Balance Sheets for your small business, a Personal Financial Statement, and your resume on experience if this is an acquisition or start-up business.

Also, a copy of your credit report would be helpful in order to do a global debt analysis of yourself. There will be more, but this short list is a good start for a lender to see if your project is feasible and able to move into underwriting.

Most SBA loans are going to be a variable term and will be based on the prime rate plus a spread of usually between 2.25 – 2.75. This means that as the prime rate that the Federal Reserve controls goes up, the interest you pay will go up. When the Fed cuts rates, the interest you pay will also go down.

This is important to know because some loans for small businesses can be fixed at times. The problem with fixing loans right now is that they will be fixed at a higher interest rate. When interest rates go down in the future, your fixed interest payment will remain at the higher rate instead of trending downward as rates trend downward. The current prime rate for a fixed interest small business loan is 7.5% as of December 2022.

Usually, there is an SBA fee to calculate of roughly 3% of the loan amount, which will be rolled up into the small business loan itself. This fee’s purpose is to act as a fund to cover the cost when a loan goes bad and must be charged off by the SBA. For a limited time, the SBA is not charging this fee for loans under $500K.

There are also other closing costs, such as title fees, attorney fees, appraisal fees, and business valuation fees. These fees will be specific to your loan and what you are doing with your loan. Some of them may or may not apply to your scenario.

SBA loans have two different terms. When there is commercial real estate, the loan will be amortized over 25 years. When the loan does not have a real estate component, then it will be amortized over 10 years. Sometimes, when you are financing real estate and other items together, the rate can be blended. However, this is getting rarer and rarer, and for reasons, I am not going to get into in this article, not recommended.

Also, as a general rule of thumb, when you are acquiring a small business and the real estate is more than 50% of the total project cost, then the whole loan can be amortized over 25 years.

Too many times, borrowers go to the bank they currently do business with for a loan, and that usually is the wrong move. The reason is that there are not too many banks or institutions that really know SBA lending and are efficient at it. At ICA, we pride ourselves on the system that we have in place that keeps the loan process flowing very rapidly. Your loan will not be caught up in levels at our bank that prolong the timeline to close.

We are on top of all the processes that go along the way and don’t allow small business loans to get stuck. Also, you will want to work with a Preferred Lender Program (PLP) which can approve a loan without having to get permission from the SBA prior. This will save two to three weeks in the process, and we are definitely a PLP lender who is ready to get you Approved and Closed quickly!