SBA 7(a) Loan Program

SBA 7(a) loans are one of the most popular SBA loan programs because they provide the lowest down payment (10%) for real estate acquisitions, are a long term solution with no balloon payment, have competitive terms and a variety of uses. Small businesses can utilize the SBA 7(a) program to acquire their own office, warehouse, store, or other commercial real estate, or even construct a brand new facility. The key is that the business must occupy for its own use at least 51% of the property. Other uses for SBA 7(a) loans include equipment purchase and working capital.

Banks, credit unions, and other approved SBA lenders are eager to utilize the SBA 7(a) program because it offers the lender a guarantee against potential default by the borrower. The lender is willing to take on more risk by financing up to 90% of the purchase price rather than the typical 70% or 80% with conventional financing because the SBA provides a guarantee against potential losses should the loan ever default. The government guarantee helps keep capital flowing, which further facilitates economic growth.

Program Overview

Loan Amount: $5,000,000
Term Length: Up to 25 Years
Max LTV: Up to 90%
Amortization: Up to 25 years
Interest Rate: Prime + 2.75%
Closing Time: 4 - 6 weeks
Use Type: Purchase, Construction, Rehab

Pros And Cons Of Fannie Mae
Small Balance Loans

Pros

  • Low Rates & Costs
  • High Leverage (80% LTV)
  • Long Amortizations (30-yrs)
  • Cash Out Available
  • Variety of fixed rate products
  • Non-recourse
  • Limited Personal Financial
  • Flexible Prepayment Options
  • Assumable & Streamlined

Cons

  • Conservative Underwriting
  • Sponsor Liquidity
  • Requirement
  • Longer Closing Process
  • Property Must be Stabilized
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Pros and Cons

Pros

  • Up to 90% financing
  • Low down payments
  • Long loan terms
  • Reasonable interest rates
  • Wide variety of uses
  • No balloon payments

Cons

  • Extensive paperwork
  • Longer approval process
  • Need good credit

What Do I Need To Qualify

  • For profit business
  • 680+ credit score
  • 10% down payment
  • 3+ years in business
  • Occupy > 51% of building
  • Positive cash flow & net income

Disclaimer: These are general qualifications. Other information might be considered during your application.

Eligible Properties

office

Office

Retail

Retail

Industrial

Industrial

hospitality

Hospitality

restaurant

Restaurant

land

Land

Other eligible properties include:


Single Use: Amusement parks, Auto service centers, Bowling alleys, Car washes, Cemeteries, Clubhouses, Cold storage facilities, Farms and dairy facilities, Funeral homes with crematoriums, Gas stations, Golf courses, Hospitals, surgery centers, urgent care centers and other specialty medical facilities, Marinas, Museums, Nursing homes, including assisted living facilities, Sanitary landfills, Sports arenas, Theaters, and Vineyards and wineries.

Multi Use: Art galleries, Breweries & distilleries, Child or adult day care facilities, Event centers, Film, radio and recording studios, Laundromats and dry cleaners, Parking lots, Preschools and Montessori schools, Restaurants, Self-storage facilities, Tow yards, and Wedding chapels.

Loan Structure

A 7A loan may be used to finance up to 90% of the total project costs, as well as to finance other items such as inventory or to provide working capital.

What's The Difference Between SBA 7(a) and SBA 504?

Both loans are great programs offered by the SBA and both can be used to acquire or develop commercial property for the small business’s use, but they are generally designed for different purposes. The key difference is that 504 loan is a low, fixed rate program, providing predicable loan payments, while the 7(a) program is a variable interest rate and payments may become unpredictable in rising interest rate environments. Also, the 7(a) program may be used to obtain working capital, while the 504 program does not provide that use.

SBA 7(a)


General purpose, working capital, acquiring or starting a business, refinancing existing business debt

  • Max loan: $5,000,000
  • Variable Rate
  • To purchase land or buildings
  • To finance new construction as well as expansion or conversion of existing facilities
  • To acquire equipment, machinery, furniture, fixtures, supplies, or materials
  • For short or long term working capital
  • To purchase inventory
  • To refinance existing high-cost business debt
  • To purchase an existing business

SBA 504


Purchase of commercial real estate, construction, and heavy machinery

  • Max loan Unlimited (max. SBA portion is $5 Million)
  • Fixed Rate
  • Purchase land
  • Purchase existing buildings
  • Renovate, expand, or modernize existing buildings
  • Energy upgrades
  • Build new new facilities
  • Finance improvements (including grading, street improvements, utilities, parking lots and landscaping)
  • Purchase long-term machinery and equipment

Required Documents

Personal Documents

  • Personal financial statement
  • Personal tax returns (3 yrs.)
  • Bio / Resume
  • Credit Report

Business Documents

  • Profit & loss statement
  • Balance sheet
  • Corp. tax returns (3 yrs.)
  • Bank statements
  • Business plan

Purchase & Construction Documents

  • Purchase & Sale Agreement
  • Construction Plan & Budget
  • Contracts with Builder, Architect, etc.

Other documents may include: Business Debt Schedule, Leases, Franchise Agreements, Legal Documents (licenses, articles of incorporation, bylaws or operating agreement)

Required Documents For SBA 504

Personal Documents

  • Personal financial statement
  • Personal tax returns (3 yrs.)
  • Bio / Resume

Business Documents

  • Profit & loss statement
  • Balance sheet
  • Corp. tax returns (3 yrs.)
  • Bank statements
  • Business Plan

Is SBA 504 Right For Me?

Eligible Borrowers

  • Operate as a for-profit entity
  • Meet the SBA’s definition of a small business
  • Conduct business in the United States
  • Have personally invested equity in the company
  • Must have a feasible business plan
  • Use the loan for sound business purposes
  • Not be delinquent on any debt obligations to the U.S. government

Loans cannot be made to businesses engaged in speculation or investment in rental real estate. Certain businesses, such as lending companies, life insurance companies, gambling companies, private clubs, religious affiliated companies or schools, or strip clubs are generally ineligible. Individual owners of the business are subject to background check and felons are generally ineligible.

Program Requirements

  • Determined by industry type
  • Annual sales not to exceed range of $750,000 to $33.5 million for retail, service and agriculture
  • Number of employees not to exceed range of 100 to 1,000 for wholesale and manufacturing

Stated Income Case Study

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Read the full case study

Fees and Costs

  • SBA Fees: Up to 3.75% of the loan amount
  • Closing Costs:Includes recording fees, title company closing fee, title insurance, and attorney's fees; various based on lender and geography

Fees may be financed as part of the loan.

Prepayment Penalties

  • SBA 7(a) loans have a pre–payment penalty if the term of the loan exceeds 15 years. If so, the pre-payment penalty is 5%, 3%, 1% for the first 3 years only.

Borrower Entity

The borrower entity is the operating business. The business generally must have been in existence for at least 2-years. The ultimate property owner may be a holding entity owned by the business or the business owner and it will be a co-borrower and the mortgagor.

Recourse

Generally, any individual with at least a 20% or more ownership interest in the borrower should expect to provide a full personal guarantee

Timing

Getting from term sheet to the closing table is often a two-way street. Borrowers that promptly provide documentation and answer underwriting questions can dramatically speed up the closing process. While it is possible to close in less than 30-days, the typical closing period is 6-8 weeks. Often times, the closing period is dependent on outside sources, such as property inspections or appraisals, so borrowers should be proactive with time provisions in purchase contracts.

Partial Occupancy

If the collateral property is only partially occupied by the business and the other portion is occupied by tenants, it will qualify for SBA 504 financing if the business occupies 51% or more of the property. The lender will include the rental income as part of the income generated to support the loan. Borrowers should expect to provide a rent roll and operating expense statements, as well as leases for the property as part of the underwriting process.

Third Party Reports

Property related reports, such as an appraisal, property condition report, and a Phase I Environmental Report are usually required. These reports must be ordered by the lender. Borrower should expect to remit a cost deposit to the lender to cover the costs of these reports..

Approval Process

1. Create loan request here.
2. Supply preliminary documents.
3. Select a loan program and product.
4. Receive preliminary approval.
5. Review and accept term sheet; remit deposit.
6. Lender completes underwriting.
7. Loan approved. Final terms reviewed and accepted.
8. Appraisal and third party reports ordered.
9. Loan closed and funded.