SBA in the Spot-Light

As a rule, most business owners have always preferred to borrow money directly from commercial banks or other funding sources without going through the hassle of securing government assistance.   When it comes to SBA financing many business owners think the process is long and arduous.  Although the process can be slightly longer and certainly some additional paperwork is required, most of the SBA lenders we work with are approved underwriters for the SBA, meaning when they approve the loan it is already approved with the SBA, so the timeframe to get loans approved and closed is really not much different than it is with traditional bank loans anymore.


Most business owners only look to SBA financing when they are looking to start a business, buy a business, expand a business, or if they are in a higher risk industry (such as restaurants, hotels, entertainment, etc.).  However, the SBA 7A and SBA 504 loan programs offer some great SBA benefits for customers looking to refinance and consolidate debt as well. Some benefits of the SBA loan programs, that could help a borrower struggling from the impacts of Covid-19, are as follows:


  • For SBA 7A loans, if 51% or more of the debt is secured by 51% or more owner-occupied commercial real estate, you can get a 25-year amortization on the entire loan amount. If the debt is all business asset related, the standard amortization is 10 years.  If less than 51% of the debt is secured by owner-occupied real estate and more is business asset related, then the amortization between the real estate and business asset portions can be blended to an amortization somewhere between 10 and 25 years on the entire debt amount.  The longer amortizations provided by SBA financing can often provide needed cash-flow relief and help a business qualify for financing that it would not qualify for at traditional bank amortizations of five years on business debt or 20 years for commercial real estate debt.


  • SBA 7A loans do not have to be 100% collateralized. If you do not have sufficient collateral to support your loan with a traditional bank but you have the cash flow to support the debt service on an SBA loan, you can refinance your existing debt and potentially even get more working capital without being fully collateralized.


  • SBA 7A loans can be used for just about any legitimate business purpose including working capital, inventory, equipment, furniture & fixtures, build-out expenses, 51% or more owner-occupied real estate, moving expenses, closing costs, etc.


  • With the SBA 504 program you can refinance up to 90% of the value of a 51% or more owner-occupied commercial property and in doing so can secure a 20 or 25-year fixed rate on 40% of the loan amount. You can roll into this refinance some other eligible business-related expenses in addition to what you owe on your current mortgage, so it can provide a means to access long term debt. The May debenture rate for 504 refinance loans was 2.78% fixed for 25-years and 2.70% fixed for 20-years.  Currently SBA 504 rates are extremely low.


  • Most Banks underwriting requirement for the debt service coverage ratio on standard commercial loans is 1.25x or higher. The minimum debt service coverage ratio to qualify for SBA 7A and SBA 504 financing is 1.15x.  So it is easier to qualify for SBA financing.  In addition, both programs will also allow for loans to be funded based on projected cash flow if the funds are being used for a new or an expanding business and the projections can be supported.


  • Most lenders do not put any loan covenants (ongoing financial conditions that must be met post-closing like a minimum debt service coverage ratio or net worth requirement) into their SBA loans. So, if you get a 25-year SBA 7A loan, so long as you continue to own and operate the business and make your loan payments, without a covenant in place the Bank cannot call your loan.  So even if you lose money for multiple years in a row, the Bank cannot call your loan like a traditional bank could that had a minimum net worth or debt service coverage ratio built into the loan.


  • Due to the fact that with the SBA 504 program the Bank is at a 50% loan to value and with the SBA 7A program the Bank has a 75% guaranty from the government on the loan, the presence of both of these programs gives the Banks additional comfort to make loans that they might not otherwise make because much of the risk is removed for them by the presence of the SBA guaranteed debt.


Although there are other advantages to both programs, the above highlights some of the main benefits a business might have that is looking to refinance debt in this market.  If you would like to find out if an SBA loan is right for you and your business or would like to discuss other aspects of either program, please do not hesitate to contact us at any time.