Finance Roll

Business owners that are looking for viable commercial mortgage loans should look hard at SBA financing. These loans continue to close and relative to other sources of capital, like conventional bank loans, SBA financing is much healthier. In addition, SBA loans have many advantages over conventional financing, which we discuss below.

But first, let me address a few common concerns with SBA financing. The SBA has a bad reputation with many, as being overly cumbersome. And granted, if you work with the wrong bank, you will likely double the processing time to get the loan done. Many banks that are not fully focused on SBA loans, will have to have their loans underwritten twice, once by the bank, than by the SBA... If you go with the right source, your loan will only have to be underwritten once.

The other common concern is that people have a misperception that if one bank declines the file that the loan request must not fit the SBA guidelines and is not eligible. People need to keep in mind that banks finance deals, the SBA only guarantees the debt for the bank... And banks guidelines are almost always more restrictive than the SBA's. If you have been declined, keep looking and find out why.

Commercial Mortgage Loans Vs SBA Loans

Highest loan to value in the business. SBA loans go up to 85% financing on refinances and 90% on purchases. In addition, it is common to roll all cost of a project into a loan. For example, if you where purchasing an office building for $800,000 and needed an additional $200,000 for renovations and equipment for $200,000, you would be able to get 90% financing on the $1,000,000...

Most conventional financing would require you to put 30 - 40% down on the $800,000 purchase price and the renovation/equipment financing would be up for grabs. You would likely having to pay for those items in cash. On refinances, conventional commercial mortgage loans now rarely exceeds 60% loan to value. Again 85% with SBA vs. 60% conventional; this is the decision maker for many businesses.

25 year amortization with fixed periods ranging from 3, 5, 7, years is still available with the SBA. Conventional commercial financing is now capped at 3 -5 year fixed rates with amortization schedules rarely exceeding 15 - 20 years. These shorter amortization schedules increase monthly payments significantly and can be a serious drain on cash flow.

No balloon clauses with the SBA. SBA loans are fully-amortizing, meaning that they pay off by the end the amortization period. Most conventional loans will have a structure such as a "3 year fixed period, with a 10 year term, on 20 year amortization schedule." At the end of the 10 year term, the borrower faces a balloon. With SBA financing there's never any pending balloon that could very well put the borrower in a bad position.

Relatively low prepayment penalties with the SBA loans. On a SBA 7a loan, the pre pay is 5% in year one, 3% in year two and 1% in year three, gone thereafter. The borrower is allowed to pay down the principle by up to 25% of the balance without incurring the prepayment penalty. Compared to the typical conventional prepay at 5% for 5 years or a 5% step down, the SBA pre pay is cheap and more flexible.

None of the above really discussed the most important point of all - that SBA loan are the most viable and reliable sources of commercial mortgage loans in the business today. The credit crisis will likely to continue for another year or more. These loans are still closing while many conventional loans die while the loan is in underwriting, costing the borrower thousands of dollars and two to three months of wasted time and effort.