The SBA 7a loan guaranteed program offers many advantages to business owners that are seeking to purchase or refinance a property they already own (YES you can refinance with the 7a). Primary benefits include, high leverage, working capital, no balloons, and lenient underwriting.
High Leverage
Most borrowers will enjoy the highest levels of financing in theindustry through the 7a program - 90%. Special use properties, such as bowling alleys, motels, gas stations, etc will still be eligible for high financing but will often be offered lower ratios at 85%.
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Loan to Cost Financing
The 7a program allows borrowers to get high leverage, loan to cost financing. For example, say the borrower is purchasing a property at $800,000 and needs to put $200,000 to renovate. Total projecr cost would be $1,000,000. The 7a the borrower could finance 90% of the total $1,000,000. So the borrower would only have to come up with $100,000 out of pocket. Conventional financing normally dictates the borrower come up with 20% of the purchase price (20% of $800,000) and pay for the $200,000 renovation costs out of pocket as well - total out of pocket would be $160,000 + $200,000= $360,000 vs. $100,000.
Working Capital
Borrowers can roll working capital into the loan as well as long as the borrower uses the money specifically for business purposes. Typically the funding bank will simply set aside the money into an escrow account where the borrower can access upon request.
Longer Amortization
25 year amortizations schedule is the norm. And, despite what borrowers might have heard from their local banks the 7a can have fixed rate financing. We work with 2 banks that offer this with a 5 year fixed rates.
No Early Balloon Payment
SBA 7a loans are fully-amortizing, meaning that the loan pays off by the end the amortization period. The loan does not have a balloon where the borrower is expected to pay off/refinance the debt. Also no pay on demand clause, like on most conventional mortgages.
Below Market Prepayment Penalty
The typical prepay on a 7a loan is 5% in the first year, 3% in the second and 1% in the 3rd year. In addition the borrower is allowed to pay up to 25% of the balance without incurring the prepayment penalty while in the first 3 years. So, the borrower could actually pay off the entire SBA loan in 3 years and one day and not have to pay the prepayment penalty.
No Ongoing Debt Service Requirements
Traditional banks almost always want to monitor a borrower's financials on a monthly or quarterly basis to make sure that the cash flows are still sufficient. If the businesses cash flows do not fit the required ratios, banks normally hold the right to call the borrowers loan (Even if the borrower is current). This ongoing monitoring is not required on SBA mortgages.
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