SBA 504/7A Loans Program
- When you are considering a small business loan, there are several loan options available. If you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is the best choice. If purchasing a business or getting working capital is the goal, the SBA 7A loan is probably a better loan option for you.
- With an SBA 504 loan, money can be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment.
- 7a loan proceeds can be used for short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies
| SBA 504 LOAN (Commercial Real Estate & Equipment) 90% Fixed-Rate |
SBA 7(a) LOAN (General Purpose) |
|
|---|---|---|
| LOAN SIZE | Minimum – $125,000 Maximum – $20 million + |
Minimum – $50,000 Maximum – $5 million |
| INTEREST RATE | Fixed 4-6% | Predominantly variable; some fixed-rate options |
| TERMS | • 25 years – real estate • 20 years – real estate • 10 years – equipment |
• Up to 25 years – real estate • Up to 10 years – business acquisition, equipment • 5 to 7 years – working capital • Weighted average for mixed-use requests |
| DOWN PAYMENT | 10% borrower | Minimum 10% borrower(often more) |
| ELIGIBLE BUSINESS SIZE | • Business net worth not to exceed $15 million • Average net profit after taxes for 2 consecutive years not to exceed $5 million |
• Determined by industry type • Annual sales not to exceed range of $750,000 to $33.5 million for retail, service and agriculture • Number of employees not to exceed range of 100 to 1,000 for wholesale and manufacturing |
| LOAN STRUCTURE | • 50% bank loan • 40% CDC loan • 10% borrower down payment |
• Loan structure negotiable; dependent on risk • 10% down payment (minimum) |
| PROCEEDS USE | • Purchase existing building • Land acquisition and ground-up construction (can include soft cost development fees) • Expansion of existing building • Finance building improvements • Purchase equipment |
• Expand, acquire or start a business • Purchase or construct real estate • Refinance existing business debt • Buy equipment • Provide working capital • Construct leasehold improvements • Purchase inventory |
| PROGRAM REQUIREMENTS | • 51% owner occupancy for existing building • 60% owner occupancy for new construction • Equipment must have minimum 10-year economic life |
• 51% owner occupancy for existing building • 60% owner occupancy for new construction • All assets financed must be used to the direct benefit of the business |
| COLLATERAL | • Generally, project assets being financed are used as collateral • Personal guaranties of the principal owners of 20% or more ownership are required |
• Subject assets acquired by loan proceeds • Pledge of personal residence unless bank can justify why unnecessary • Personal guaranties of the principal owners of 20% or more ownership are required |
| FEES | • Fees are financed in the 504 loan • Fees are negotiated for the 50% bank loan • Servicing fee (lowest allowed by SBA) for CDC plus a legal review fee |
• Fees are financed in the 504 loan • Fees are negotiated for the 50% bank loan • Servicing fee (lowest allowed by SBA) for CDC plus a legal review fee • Fees can be financed in the 7a loan • Fees vary with the size of loan paired with 504 loan • Additional .25% charged on any loan portion above $1 million |
USDA Loans
USDA Business & Industry (B&I) loan program provides up to 80% loan-to-value financing for the acquisition, construction, or refinance commercial real estate located within eligible rural areas. This program helps to create and maintain employment, and improve the economic and environmental climate in rural communities.
| Loan Amount | Up to 10mm |
|---|---|
| Term | Up to 30 years |
| LTV | 80% |
| Rate | 4-7% |
| Property Types | All commercial real estate located in USDA eligible areas |
| Collateral | First Mortgage |
| Prepayment | 5 years |
| Fees | 1% |
| Gaurantees | Full recourse |
Key difference between SBA V USDA
SBA loans can be done nationwide, while B&I loans must be in cities and towns with a population of less than 50,000. The intent of the B&I program is to assist credit-worthy rural businesses to obtain needed credit for qualified business purposes. They focus on creating and saving jobs in rural America.
- The next item is what will the loan proceeds be used for? If the project is at least 51% owner occupied real estate, then the 7a, 504, or B&I program is usable. B&I can be used for rental properties in Opportunity Zones, if these are creating jobs. Large equipment loans can be guaranteed by the 7a or B&I program. If you have a borrower needing working capital, company buy-outs, or loans without substantial real estate or large machinery collateral, then the 7a or express program is for you.
- Loan amount is a consideration. Most 7a loans have a max of around $5 million. 504 loans have a structure that may go up to $10 million between the 504 and underlying first loan. B&I guaranteed loans can go up to $25 million and may be increased above this in some cases.
- Amortization is the next factor. 504 loans can have up to a 25-year amortization and the underlying first mortgage has to have a term of at least 10 years. 7a loans have a blended amortization depending upon the purpose of the funds with real estate having a term of 25-30 years, equipment is usually at 7 years, and working capital 5 years. B&I loans can go up to 15 years on equipment and 30 years on real estate. The longer amortization may help free up cash flow.
Balloons are another factor. B&I guaranteed loans cannot have a balloon feature on them. SBA 7a loans are also full term with no balloon. The first mortgage in front of an SBA 504 loan will usually balloon in 10 years and must be refinanced.
- Prepayment considerations are important. SBA 7a loans will have a prepayment in the first three years. 504 loans have a prepayment in the first 10 years. B&I loans have no prepayment on them.
- The borrowing entity is also an issue. SBA must have a for-profit operating company as a borrower. B&I loan can have individual investors, non-profits, cooperatives, Federally-recognized tribes, and public bodies as eligible borrowing entities.
- Interest rates on the SBA guaranteed loans are highly regulated by the SBA. 504 loan rates are set by the bond debenture market. The B&I lender has more power to negotiate a rate acceptable to both borrower and lender, assuming the rate is not uncommon with other credits the lender has.
How much your institution wants to guarantee is important. B&I loans can have a guarantee from 60-90%. SBA express loans have a 50% guarantee. Export express loans and international trade loans may go up to 90% as a guarantee. 7a loans will range from 75-85%. The SBA 504 loan is not a guarantee but is a junior lien behind your first mortgage.
- Each program does have its own quirks. The SBA eligibility has a net worth threshold of the sponsors on the credit, which looks at affiliated owned entities. A borrower who grows to a certain size may be too large for the Small Business Administration standards.
- The B&I program has a stringent tangible debt to net worth ratio requirement. Some items on the company balance sheet may not be considered as assets or tangible equity which can push the ratio higher. B&I also has a multi-agency checklist that can become squirrely if you have a project in a national historic district, wetland, or reservation.