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Video Spotlight: SBA Lending: 7(a) and 504 Loan Options

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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.

Video Spotlight: SBA Lending- Advantages and Disadvantages of Financing with SBA Loans

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Transcript – Provided and/or Formatted by BorrowStar

Welcome back! Today, we’re talking about business financing. Specifically, using a U.S. Small Business Administration loan, or an “SBA Loan” through a local bank to obtain financing for your business. My name is Thomas Rockwood, and if you have any questions whatsoever about SBA financing or would like more information about getting access to capital for your business, please feel free to reach out to me directly at any time at Thomas@LifeForth.com. Specifically, today, what I wanted to talk about was some advantages and disadvantages of using an SBA Loan for the solution of funding your business. Whether it’s a business acquisition, you’re trying to get capital for an existing business, Or there’s a specific transaction you’re trying to pull off such as purchasing real estate, or expanding your location buying equipment, buying inventory, any of those things. Ultimately, I think that there are three reasons why businesses choose an SBA Loan over conventional lending or alternative finance. And I think that comes down to Cash injection or the equity requirements that involved, the term of the loan (how long you have to repay back that loan), and then the types of transactions you are trying to pull off.

Whether it’s buying a business, starting a new business, purchasing real estate buying equipment or inventory or just needing working capital. All of those things will have different appetites at different banks. One of the first things I think it’s important to look at is is the loan request that you’re trying to do for your business, is it eligible at the SBA? And then, after you get to a “Yes, okay. This is SBA eligible,” then it comes down to: “Is this is something that the bank wants to do?” Do they have the appetite to actually fund that type of transaction or that industry? Or given the factors of your cash injection or the term you are looking for, is that something they are interested in doing? Once you’re in that space and you are saying, “Okay. I have an eligible request.” Now, it comes down to appetite, then I really think you are looking at different banks as a solution, as opposed to eligibility and looking at it from the SBA side.

Advantages, specifically. Why would you want to look at an SBA Loan? There are advantages and disadvantages to every type of financing. So, we’ll start with what would really benefit your business. And I think that typically comes into the amount of cash you have to put the transaction. For example, If you are trying to buy or start a business, Typically, a bank’s gonna want to see cash injection There might not be specific regulation or direction from the SBA, in the SOP that says, that says you must have this specific cash injection amount. And in that case, you really dealing with bank appetite. I don’t see a lot of 100% financing anymore.

So, you know, a good rule of thumb is if you start with 20% or so of the project to inject, then I think you’re heading in the right direction. If you have less than that, , 10%, you might lose a few banks’ appetite but I still think it’s an eligible request depending on the type of business and what you are trying to do. You know, cash injection requirements are really going to be bank by bank. And that’s going to be something that you’re going to want to look at and assess as you’re looking at your lender. The other thing to really consider is the term of the loan. In a business acquisition scenario, the SBA will allow for a 10-year term. If you are trying to buy real estate, You can extend up to 25 years. Those are typically beyond what I would say the normal conventional loan would allow or what an alternative financing would allow.

The term of the loan is really a key component because that’s gonna spread your payments out over that much period of time and allow for the lowest possible payment on a month-by-month basis for your business. Whether you’re starting up or expanding that direction. So, the terms of the loan, I think, are a key advantage. And depending on what you’re trying to do, if you’re involving real estate or heavy equipment that has a long life, a useful life, you can get 20 to 25-year financing options, and there’s different loan programs that you can participate in. The third main advantage of using an SBA Loan is really going to be the types of transactions you’re able to do. A lot of conventional lending? They want to have tangible assets. If you can’t touch it, it’s probably not going to be financeable.

So, a lot of conventional lending is around equipment, around real estate, and they might do some lines of credit around your receivables. But in the case of a business acquisition, if you are buying a business and you are a new owner in that business? That might be a very tough transaction to find a lender to do conventionally. Alternative financing might not be an option because you don’t have a historical track record. So, the SBA Loan is a great tool to make that business acquisition, and it really provides the bank the incentive to say, “yes.” Say, yes to this transaction. Help this buyer make this acquisition and get this ball going for this company. Franchise start-ups Start-ups are also a tough one to pull off simply because you don’t have historical revenues. So, a franchise that’s eligible with the SBA, it’s a good option to use an SBA Loan to fund that start-up cost.

There’s a lot of start-ups that don’t have franchises. There’s specific regulation you’re going to want to talk to someone about your specific business you’re trying to start-up But I think that’s a great example of also a type of transaction that falls outside of the conventional financing option and outside of the alternative financing and falls well within the SBA. So, again, when you’re looking at SBA Loans, some advantages are always gonna be the amount of cash you can put in is gonna be probably lower than that of alternative or conventional financing. You can probably get longer terms which is gonna get you a lower monthly payment. And the types of deals you’re trying to put together…. If you are trying to do a lot of different things, such as, you’re starting a business that’s gonna need a lot of equipment, real estate, and working capital, plus you’re gonna need inventory. All of those things are eligible to be financed with the SBA Loans. So, depending on what you’re trying to do or how broad you need your financing to cover, SBA Loans have a good reach.

So, there’s a lot of talk about the disadvantages of an SBA Loan. We’ve gone through some of the advantages. You know, I think, commonly what I hear is: that either there’s too much paperwork or it takes too long or it’s too heavy on the fees. And I guess to address some of those, I think a lot of it has to do with you know, as you start your process with an SBA lender at a bank, I think your experience is going to be heavily dictated by who you are working with. The experience of that lender and of that bank doing SBA lending. Working with the right lender up front is going to help you set your expectations, it’s gonna map out the timeline it’s gonna take to pull of your specific transaction. And I think that’s gonna be the probably the most satisfying piece for your experience going through the SBA Loan process. There are checks and balances, and there’s a process to an SBA Loan.

It doesn’t matter which bank you go through. We all have to go through the exact same regulation and the exact same process for the most part. So, talking with your banker up front, and understanding what that is going to be– having that expectation set and laid out for you– is gonna make your experience much more pleasurable. The fees? The fees are the fees. I don’t think it varies too much bank-to-bank. In most cases, most lenders come in at about the same cost. The main advantage I see is going with an SBA Loan to cover those fees.

A lot of conventional loans, they don’t cover the closing costs. They don’t cover the environmental, the appraisal, the closing attorney, any of those other pieces. So, SBA Loan proceeds can cover that. The SBA also has programs– so, if you are a business and you are a 51% veteran-owned business or more so, if you are a service veteran, there’s fee reductions currently in place. And at the time of your loan application, you’re gonna want to talk to your lender about what those are. But on some loans, they waive the fee entirely. So, for the service you’ve put into our country, the SBA tries to at least reduce those fees where we can and help you get your business up and running and off the ground. I appreciate your taking the time to watch the video.

Take a look at the rest of the videos when you get a chance. If there’s a specific topic you’d like me to cover, please let me know. Again, my name is Thomas Rockwood and you can reach me directly at Thomas@LifeForth.com. Next time, we’ll be talking about some of these topics more in depth. So, check out some of those videos. Look at the other videos on the website, and hopefully, this helps get you in the right direction in terms of getting your business financed.