This post is a little bit of a read, but I think it will be worth it if you are in either of these two categories of people and you’re considering an SBA loan program.
As a lender who has been very active in SBA 504 and 7a for the past 10 years, I still see a lack of knowledge base on when to use SBA products—many customers never get the benefit from these programs as these are programs that most banks don’t know how to use effectively. If greater understanding from bankers, customers, and advisors existed, there would be even greater usage of the program; small businesses would be better positioned to grow; and there would be more benefit to the economy.
I am buying a building and I don’t want to finance SBA 504 because I can qualify conventionally and SBA is for weaker businesses.
For any business that is purchasing a building that they will owner occupy for an extended period of time, I am going to recommend the SBA 504 product as the go-to. Why?
This isn’t about weak or strong, this is intelligent use of all the products that are available to you.
Let’s start this out by stating that growth is funded by capital, which doesn’t just come from a line of credit. There is also an option of loaning a business money/capital and having them pay it back over a period of time.
For businesses that have reasonable leverage and more room for error, the conventional line of credit might be the best option for the business. However, if the business is leveraged and they need capital to grow, the best option is going to be an SBA 7a loan for permanent working capital. Lending the business capital under this SBA program and the repayment term is up to 10 years. Would you rather have to pay growth capital back in 1 year (Conventional Line of Credit) or 10 years (SBA 7a loan)?
I have seen many businesses make this mistake and we correct it later after they have been consistently questioned by their current bank “Your line is fully drawn and you haven’t paid it back in a year; when are you going to pay your line of credit back?” It is a case of wrong product usage and the worst part is the bank thinks it’s solely the borrower’s fault. Who is the financial expert?
Business purchase financing for the most part is challenging to finance conventionally if the Guarantor doesn’t have a high net worth for 3 reasons:
1) It is typically leveraged;
2) The business cash flow that they are buying was not produced by them, but rather the prior owner, so there is transition risk; and
3) Often times, there is unsecured debt involved due to multiples being paid on cash flow/blue sky/goodwill.
So, many people don’t know that they can utilize the SBA 7a program to buy a business. Relative to the purchase price of the business, if you have enough cash saved for the down-payment (sometimes as little as 5 % of the purchase price with a cooperative seller); if you have industry experience and the right business acumen; your personal financial situation is managed and credit are good; the SBA 7a loan program should allow you to accomplish your dream of being your own boss.
Article contributor: Jonathan Dolphin, President, 21st Century Bank
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