By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
The most popular SBA loan programs consist of the SBA 504 and SBA 7a loans. Virtually all borrowers that secure SBA financing go with one of these 2 programs. What are the differences and advantages of each of these? That’s what’s discussed here.
Terms of the SBA 7a Loan
The terms of the SBA 7(a) program are relatively simple and virtually all banks and lenders that fund these offer the same terms. Here’s a basic overview:
- The loan can be used to finance commercial real estate, equipment, business goodwill, working capital, partnership buyouts and debt consolidation.
- Amortizations schedules of the loan range from 25 years to 5 years depending on what is being financed. For example, real estate is amortized over 25 years. Equipment is normally financed over 10 years or its useful life. Working capital normally is tied to a 7 year period.
- Interest rates are normally quarterly adjusting (only about 5% or so of banks offer 3 or 5 year fixed rates on the 7a) floating and tied to Prime or LIBOR. The max margin banks are allowed to charge is 2.75% over the Index.
- Prepayment penalty is 5% year one, 3% year two and 1% year three, gone thereafter.
- 90% loan to value is currently the max that most banks will go.
Most borrowers end up going with the SBA 7a loan. This is the classic SBA loan that is used for start ups and is really their flagship program. In addition, banks are more aggressive as far underwriting/risk tolerance with the 7a as well. This has a lot to do with how this loan sits on the banks balance sheet and that they can sell the loan easily, for a major profit, on the secondary market.
Keep in mind though that just because the terms of the 7a are similar from one bank to the next does not mean that the credit box from one bank to the next is the same. There is a wide difference from what one lender perceives as a transaction that they want to fund versus another. Not all 7a lenders are the same as far as what they will approve.
Terms of the SBA 504 Loan
The terms and use of the SBA 504 loan are much different than the 7a. It is used mostly for the purchase (or refinance) of commercial real estate. However, it can be used to purchase equipment, but this doesn’t happen that often. Here’s what you can expect as far as terms with this program:
- 90% financing is widely available. Some special use properties will be cut down to 85% but the vast majority of borrowers get 90%.
- Long term fixed rates from 3, 5, 10 and 25 years are available.
- The loan consists of 2 separate loans, broken up by lien position. The first lien position loan is a bank loan that goes up to 50% loan to value. The second is the CDC loan (which is basically the SBA loan) that goes from 51% to 90%. The first loan has terms that any conventional bank loan would have. I.e. 15 – 25 year amortization schedules with fixed rates from 3 to 25 years. The second loan is almost always fixed and amortized over 20 years.
The 504 loan is by far one of the best commercial mortgage program in the business. Long term fixed rate financing at 90% loan to value is the reason but they are harder to close then the SBA 7a.