Below is a compilation of transcripts for ThinkSBA’s SBA FM Podcast that answers many questions business owners and entrepreneurs have related to applying for an SBA guaranteed loan to purchase real estate, acquire a business or franchise and obtain working capital.
What Is An SBA Guaranteed Loan?
The SBA, or Small Business Administration, is a Federal Government Guarantee Program that incentivizes banks to make loans to businesses who would otherwise not qualify for various reasons, such as, lack of time in business, experience or personal liquidity, or poor credit history etc.
The SBA incentivizes partners banks by guaranteeing between 75% – 90% of the principal loan amount meaning the banks risk in case of default is only between 10% – 25% of the outstanding principal loan balance at the time of default.
SBA Guaranteed Loans are commonly used by business owners and entrepreneurs to purchase owner occupied real estate, acquire a business or franchise, to purchase equipment and obtain working capital for growth.
Unlike conventional loans, businesses must first meet SBA eligibility standards prior to applying. The two most important eligibility tests are tangible net worth and net profit. All businesses applying for an SBA guaranteed loan must possess less than $15MM in tangible net worth or $5MM in net profit for the fiscal year prior to submitting the application.
There are other eligibility requirements that will be addressed in future episodes.
ThinkSBA can help you obtain an SBA loan to purchase or refinance commercial real estate in San Diego.
How long does the SBA Guaranteed loan process usually take?
There are many factors that determine how long it takes to apply for and close an SBA guaranteed loan. These factors include the experience and competence of your banker, the banks loan pipeline density at the time of your application, sufficient staffing levels, the banks internal processes including whether the bank uses automation efficiencies where possible or are they still doing everything hand to mouth.
Perhaps the most important factor is you, the applicant. Remember, in most cases the bank and other third party professionals tasked with processing your loan are experts and will process your loan request quickly. But in my experience what really drags out the loan process is the applicant’s inability to complete forms and answer questions quickly and accurately.
The loan process should take no longer than between 45 – 60 days if everyone is doing their part.
Do I need collateral to qualify for an SBA loan?
The answer to this question is yes and no. The reason why it isn’t black and white is because it largely depends on a few variables. So let me bring some clarity to this question.
If you are requesting a working capital loan less than $350,000 then it’s likely tangible personal or real property, or in other words collateral, is not required. However, when the loan amount is higher than $350,000 then collateral is required.
The actual amount of collateral varies and is determined by the requested loan amount, the amount of collateral available and purpose of the loan.
The definition of acceptable collateral includes but is not limited to equipment, tenant improvements and real property typically in the form of a second lien on the applicants primary residence for working capital term loans or commercial real real estate when the loan type is a commercial mortgage for the purpose of acquiring owner-occupied commercial real estate.
ThinkSBA can help you obtain an SBA loan to purchase or refinance commercial real estate in San Diego.
Do I Need a Business Plan To Obtain an SBA Guaranteed Working Capital Loan?
The simple answer is yes you do. The purpose of the business plan is twofold.
Number one, it demonstrates to potential lenders your fitness as a business owner and entrepreneur to develop and execute a winning business strategy.
Number two, it provides these same lenders the information they require to make an informed credit decision regarding the future financial success of your new venture.
When drafting your business plan answer these questions to ensure your business plan meets the strict demands of underwriting; who, what, where, when, why, how and how much.
Your business plan should be comprised of the following sections, a Cover Sheet, Statement of Purpose, Business Summary, Marketing Analysis, Financial Analysis and any other necessary Supporting Documents.
Writing a business plan is not easy. But don’t worry, we’re able to connect you to a professional who can help you every step of the way. Simply give us a call at 858-762-2774 or visit our website at thinksba.com/contact.
Do I Need Financial Projections To Qualify For An SBA Guaranteed Working Capital Loan?
Yes you do. Financial projections provide potential lenders the information they require to make an informed decision regarding the future financial success of your new venture.
You need to know these three things to ensure your financial projections are acceptable to the lender.
First, your financial projections must span a minimum of 3-5 years.
Second, your financial projections must be consistent with other established businesses within your business classification. For instance, if you are starting a dog walking service, it’s necessary to research the financial performance of other dog walking businesses. There may be some variance in your financial outcomes, but you must be able to convince an underwriter why these variances are warranted.
Third, the financial projections must be able to service the new debt requested at the accepted predetermined level by the lender or else your loan application will likely to be declined.
Preparing financial projections is not easy. But don’t worry, we’re able to connect you to a professional who can help you every step of the way. Simply give us a call at 858-762-2774 or visit our website at thinksba.com/contact.
ThinkSBA can help you obtain an SBA loan to purchase or refinance commercial real estate in San Diego.
SBA 7(a) Guaranteed Loan Program To Purchase or Refinance Real Estate Explained
The SBA 7(a) guaranteed loan program to purchase or refinance commercial real estate is comprised of one loan provided by an SBA Preferred Lending Partner which means more flexibility in determining eligibility and qualifying loan applicants.
Generally, multi-purpose properties may be financed up to 90% loan to value while special purpose properties may be financed up to 85% loan to value.
Loans are fully amortizing, with both fixed or variable rate options, three year prepayment penalty periods and no covenants which means that as long as the loan is paid as agreed there is no concern of the loan being accelerated or called.
Fees are approximately 3% of the guaranteed portion of the loan and may be financed.
The 7(a) program to purchase real estate is primarily suited for clients requiring more flexible underwriting guidelines when purchasing multi-purpose properties. This program is also preferred by prime borrowers when a bank is offering low fixed rate options.
SBA 504 Guaranteed Loan Program To Purchase Real Estate Explained
The SBA 504 guaranteed loan program to purchase commercial real estate is comprised of two loans. One provided by an SBA Preferred Lending Partner and another by an SBA Community Development Corporation (CDC).
Generally, multi-purpose properties may be financed up to 90% loan to value while special purpose properties may be financed up to 85% loan to value.
Loans are fully amortizing, with relatively long prepayment penalty periods, low fixed rates and no covenants on the CDC portion which means that as long as the loan is paid as agreed there is no concern of the loan being accelerated or called.
Fees are approximately 3% of the guaranteed portion of the CDC loan and may be financed.
The 504 program should be used for strong credit clients seeking long term, low fixed rates options who are not planning on moving, growing beyond their square footage or selling their business within the next ten years from purchase.
How Much Of A Cash Injection Is Required To Qualify For An SBA Guaranteed Loan?
The SBA requires eligible borrowers to possess reasonable personal liquidity; such as cash, marketable securities or cash value of life insurance to inject the minimum equity percentage into the financing package.
SBA 7(a) loan requests to purchase a business or franchise, buy out a partner, start up or expand a business or to obtain working capital require between 5% – 25% cash injection depending on the amount requested and the bank entertaining the request.
Due to a recent update to SBA guidelines on the purchase of a business, now just 10 percent equity must come from the buyer and/or a seller note. Out of that 10 percent, at least 5 percent must come in the form of cash from the buyer, while the remaining 5 percent equity can come in the form of a seller note.
SBA 504 loans to purchase commercial real estate require a minimum cash injection of between 5% – 10% for multi-purpose properties such as, office and industrial and up to 15% cash injection for special purpose or single-purpose properties such as, gas stations, car washes and residential care facilities for the elderly.
To be clear, borrowers are not eligible to receive SBA guaranteed financing without the ability to contribute the required cash injection into the financing package.
ThinkSBA can help you obtain an SBA loan to purchase or refinance commercial real estate in San Diego.
Can An Individual With An E-2 Visa Acquire A Business With An SBA 7(a) Loan?
Yes, E-2 non-immigrant visa holders are eligible to obtain an SBA guaranteed loan to acquire a business. However, there are several specific eligibility tests that must be met by management for the applicant business to be considered eligible.
- The Application must contain assurance that management is expected to continue in place indefinitely and have future U.S. citizenship or verified permanent resident status.
- The non-immigrant visa holder must have been a member of management for one year prior to the loan. So yes non-immigrant visa holders are eligible for a business loan but not for acquisition unless they have been a member of management prior, which is more akin to a partner buyout and not a new acquisition.
- The Lender must require a personal guaranty from the non-immigrant visa holder.
- Effective April 1, 2019, the Applicant must pledge collateral within the jurisdiction of the U.S. with a liquidation value equal to no less than the approved loan amount at the time of first disbursement and, to the extent that the value of collateral declines during the life of the loan, the Lender must require the Borrower to pledge additional collateral to ensure a sufficient collateral coverage amount.
In conclusion, if an applicant business owned by foreign nationals, foreign entities or non-immigrant aliens residing in the U.S. does not have sufficient collateral, the Applicant is not eligible for an SBA-guaranteed loan.