As the commercial mortgage industry continues to suffer and credit polices continue to tighten, entrepreneurs are starting to rely more on the classic SBA loans to get their commercial mortgages. Many businesses owner have shied away from this route, largely out of bad press, expensive guarantee fees and or floating rates.
Much has changed though and borrowers should realize that not all SBA lenders are the same, and that the SBA programs fill a large void in the market that otherwise would be difficult to fill.
Benefits
Because the Small Business Administration essentially guarantees a large portion of the loan, either 40% on the 504 or 75% on the 7a, many unique programs can be offered. For example, 90% fixed rate financing is common on purchases. Compare that to the typical bank loan of 75-70% loan to value and you can quickly see the advantage. The 504 program also boasts some of the best rates in industry and can have fixed periods ranging from 5 -25 years.
For example, as of this writing (3/5/08) 6.5% is market on a blended 504 rate at 90% on a $1,000,000 loan. A popular non bank CMBS lender that goes to 90% (30 year fixed) would be at approximately 7.25%.
TheSBA 7a loans has many advantages as well. 90% financing, on purchase AND refinances is acceptable. The borrower can use projections on their financials, which can be a way to get a loan closed if the current debt coverage ratios are too low. Or said in another way if the business doesn"t show enough income to qualify, they can use projected, increased income to make the numbers work. This is pretty much across the board unique to the SBA.
Basically the SBA loans fill a large void in the market that banks would not be able, due to risk, to fill.
Negatives
The SBA loan programs are only for owner occupants. Or more specifically, the business has to occupy at least 51% of the building. The 7a program has received much slack because the rate normally floats over prime, and adjust once per quarter (we work with a bank that offer a 5 year fixed 7a) which can be a pretty scary situation for anyone . The guarantee fee is also difficult to swallow. It is 2.75% of 75% of the loan amount, which adds up very quickly (We work with a bank that absorbs this guarantee fee).
The process can be bureaucratic and painful, especially if the funding bank only dabbles in SBA loans. It"s recommended to work a source that focuses on this option and knows the system inside and out.
All in all the SBA provides some of the best commercial mortgage options for business owners and should be the last man standing no matter how weak the capital markets become. The key in dealing with the SBA is to know who the best sources are and to not assume that all SBA programs and processes are the same.