Transcript – Provided and/or Formatted by BorrowStar
Welcome back! Today we are talking about business financing; specifically, using a United States Small Business Administration or “SBA” loan through one of your local banks. My name is Thomas Rockwood and if you have any questions whatsoever about SBA financing or would like more information please reach out to me directly at Thomas@LifeForth.com. Today, specifically, I wanted to go into a little bit more depth into the two programs you have access to within the SBA. One is the SBA 7(a) Loan, and the other is an SBA 504 Loan. Given your specific circumstance and what you’re trying to use loan proceeds with, you might have an option to use both or one of the two programs at your disposal and the rates and loan structures are typically very between them. I wanted to answer some of those questions I commonly get in regard to rate, structure, and the SBA 504 verus the SBA 7(a) loan.
I think most businesses, when they are out looking for loans– especially, in a business acquisition or in a start-up scenario– they’re gonna fall more commonly into an SBA 7(a) loan. And the reason really is when you are doing a business acquisition, there’s a heavy portion of loan proceeds that are gonna be going toward purchasing goodwill or intangible assets. When you are doing a start-up, typically, you’re not buying a lot of fixed assets. You’re going to be buying inventory, some equipment, you’ll need a lot of working capital to get your business off the ground. And so those assets really are short-term in nature and a 10-year loan term works well for those assets when you are using an SBA 7(a) loan. The 7(a) loan is a broad brush tool.
Is kind of the way I like to look at it. You can fund almost anything with it that your business might need. So, from working capital, from inventory, if you need to build out furniture and fixtures for your building, if you need any specific equipment. You can buy real estate with it. You can do a lot of different things with an SBA 7(a) loan. Most 7(a) loans are on probably 10-year terms, unless there’s real estate involved, in which case, your term of your loan can go out to 25 years.
If you’re using a lot of proceeds to fund intangible assets or short-term assets as well as that, you might find a bank that’s gonna do a blended term. So, your real estate at 25 years but then the rest of your stuff is at 10 years. So, you might end up with an 18-year loan or a 15-year loan depending on how much loan proceeds are going towards long-term assets versus short-term assets. Specifically, when it comes to real estate, you can obtain an SBA 7(a) loan and amortize that over 25 years (the whole amount) as long as the majority of your loan funds are going toward the real estate purchase. So, if you’ve got an expensive piece of property or most of your project are to fund your real estate acquisition– most of your loan funds are going in that direction– you can probably get a loan term on an SBA loan for 25 years. But still include some working capital, maybe there’s some growth that needs to be funded through working capital components.
Maybe there’s a small piece of equipment that needs to be acquired as well so some proceeds are going toward short term or aren’t going to have a useful life of 25 years. But the majority or your funds are going towards real estate and the long-term assets? Then you can take an SBA 7(a) loan and stretch it out over 25 years. The other program that the SBA offers for fixed specifically is the SBA 504 loan. Most of the SBA 504 loans have a useful life, if you are using real estate, have an amortization or a term of 20 years or a portion of it and then there’s a second loan the bank has and that has to be for at least 10 years. So, with an SBA 504 loan, you’re gonna put in a portion of the funds, the SBA will have a portion, and and then the bank will have a portion.
Specifically, as it is today, the borrower/the business has to put in 10 or 15 to 20 percent depending on the type of business you are running and where you are in that business’ life cycle. But let’s just use a 10 percent cash injection scenario. So, the business will have to put in 10 percent, the SBA will fund 40 percent, and then the bank will have a note for 50 percent of the loan. So in that case, the SBA portion– or 40 percent of your loan– if you use a million dollar project, you’re putting in a hundred thousand dollars the SBA will have a four hundred thousand dollar loan to the business, and then the bank will have a five hundred thousand dollar loan. So, in a sense, you have nine hundred thousand dollars. The best part of this from the business’ perspective is that there’s no refinance necessary for the first ten years because the SBA component is over 20 years at a fixed rate and it’s no balloons, no prepayment penalties on that piece.
On the SBA 504 loan the SBA component is a fixed rate for 20 years with no balloon payments. On the bank portion, the 50 percent portion, that has to be at least over 10 years. And so there’d be a balloon for that 50 percent some time around the ten year mark. You’re gonna have to refinance. But some banks will actually do a 20-year term and no balloon necessary in that time as well. So you’ve got two different loan structures.
Primarily, SBA 504 loans are involved in real estate or or long-term heavy equipment acquisitions or projects that involve acquiring that for the business. (a) loans? You can use them for real estate but you can also use them for a broad range of other things. I would say, currently, from a rate perspective, SBA 504 loans have a fixed rate for the SBA component. The bank portion is really up to the bank. And I see rates structured at– fixed rates–at one year, two years, three years, five years it might adjust.
Some banks will do rates fixed for ten years. So, that’s gonna be a bank by bank appetite. So, really, talk to your lender. Talk to a couple of lenders. And figure out what they’re willing to do given your business’ scenario and what you’re trying to pull off. (a) loans?
Some banks will fix a rate for one, two, three years on a 7(a) loan. Some banks will fix them for the entire term. Most banks that I see currently in the market given what you are trying to do with it, they will do a quarterly or monthly adjusting rate. So, you’ll have a margin over prime. Prime right now is three and a half percent as of the time of this recording. So, they’ll do prime plus 2.7, which is the max rate, or lower.
And that’ll adjust either monthly or quarterly. Some banks will fix it for a year, two years, three years depending on the project and what you are trying to do with it. So, that’s hopefully heading you down the right direction in terms of the types of projects you’re doing, the types of interest rate and terms that you can expect from using an SBA loan to finance your project. Again, my name is Thomas Rockwood. If you have any questions whatsoever about SBA financing or you want to have a more in-depth conversation about your specific project, please feel free to reach out to me directly. You can reach me at Thomas@LifeForth.com.