Way back in August 1897, a gentleman by the name of Thomas Edison secured a patent for a little something called a kinetograph, the world’s first motion-picture camera. As you can imagine, folks at that time had no idea just how big this would become. He developed a movie studio where he held demonstrations showcasing this new technology and ultimately inspired others to refine his invention. Here we are 125 years later enjoying our favorite films from the comfort of our homes. Personally, I’m glad that this invention withstood the test of time.
Something else that has withstood the test of time is the U.S. Small Business Administration or SBA for short. The SBA has been around for nearly 70 years and has delivered millions of loans, loan guarantees, contracts, counseling sessions, and other forms of assistance to small businesses. The SBA has many different programs, which can easily become overwhelming for business owners to figure out where to begin. I get it.
Today, we are going to decipher the most common SBA funding program that exists; the SBA 7(a) Program.
What is an SBA 7(a) loan and what are they used for?
According to the SBA, a 7(a) loan is the best option when real estate is part of a business purchase, but it can also be used for:
- Short-and long-term working capital
- Refinance current business debt
- Purchase furniture, fixtures, and supplies
One of the important things to know about SBA 7(a) loans is that the Small Business Administration does not actually issue them. SBA loans are typically originated by banks, credit unions, and other lenders. The lender will work directly with both the borrower and the SBA to ensure that the requirements for all parties are met. Ultimately, the SBA will provide a loan guarantee to your lender, which makes them feel a lot better about making a loan to you.
Who are SBA loans for?
SBA loans are for operating businesses. This means that a business must operate from the property being financed. Although, they do allow for properties to be up to 49% occupied by a tenant, so this program could work for business owners that want to supplement their mortgage payment with rents that they receive from their tenants. However, the property must be at least 51% owner-occupied.
For loans that are not used to finance real estate, the borrower needs to be classified as a Small Business Concern, which must meet the following requirements: (1) Organized for profit, (2) Has a place of business in the U.S., (3) Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor, (4) Is independently owned and operated, and (5) Is not dominant in its field on a national basis. They also have to meet SBA’s size standards, which are based on number of employees and annual revenue. Basically, these are small business loans—so the business can’t be too big.
How long are SBA loans for?
Loan terms for SBA 7(a) loans vary depending on the asset being financed. In the case of a business acquisition, the maximum loan maturity is 10 years. Real estate purchase loans can have terms up to 25 years. If a loan request is for a combination of purposes, the loan term can have a blended maturity. For example, a loan that involves the purchase of a business with real estate, may be eligible for a term longer than 10 years. According to the SBA, their programs are generally intended to encourage longer-term small business financing.
How much can you finance with an SBA loan?
SBA loans have a limit. The maximum loan amount for most 7(a) loans is $5 million. The SBA guarantee to the lender is typically 75% of the loan amount up to $3.75 million. Outside of the loan amount, businesses must also meet the eligibility requirements for the program. I’ll name two: (1) Eligible businesses must operate for a profit; and (2) Eligible businesses must have reasonable equity to invest.
SBA loans can finance up to 90% of your project cost. You heard that right! This is one of the main reasons business owners opt for this program but it’s not all rainbows and butterflies. Business owners must consider their cost of borrowing. SBA loans can be more expensive; however, a slightly higher cost of borrowing may be less than the cost of putting up a larger down payment. One way of thinking about this is in terms of opportunity cost. How can I deploy this cash to maximize it to its fullest? For some business owners, investing in their inventory or other business opportunities may be well worth the additional cost of borrowing.
Lastly, it is important to know that SBA 7(a) loans do not have balloon payments. This means that business owners get the peace of mind in knowing that they won’t have to refinance or requalify in the short-term. This also helps them save money in the long-term.
So, is the SBA 7(a) program a friend or a foe? –
Here at State ECU, we believe SBA 7(a) is a fantastic program that has withstood the test of time. In fact, in 2022 we were ranked among the top 3 lenders in New Mexico by dollar volume for 7(a) loan production. That’s how much we believe in this program.
There are several reasons why we recommend the SBA 7(a) program. Chief among those is it allows borrowers to preserve their capital by requiring smaller down payments than conventionally required. This allows business owners to invest more money into our communities. The SBA guarantees provided to the lender also make these loans much lower risk, which makes the program a win-win for lender and borrower.
This program is certainly nuanced and it can be quite challenging to navigate the intricacies of it if you don’t work with it regularly. Don’t worry, State ECU is here to help you explore all of your financing options. We’ve got your back!
Gabriel Fernandez is the State ECU Commercial Lender for the Albuquerque Metro Area. Gabriel is a New Mexico native and comes to State ECU with extensive experience in commercial real estate lending and portfolio management. He has financed a broad range of property types, such as apartments, warehouses, retail buildings, and more. Gabriel helps growing businesses and investors acquire the resources they need to prosper. Come by and speak with Gabriel about your commercial lending needs and see what he can do for your business. You can also find Gabriel on LinkedIn, by phone at (505) 989-5756 or send him an email to get in touch.
A New Mexican Perspective
