SBA 7a Loans for Small Businesses
What is an SBA 7(a) loan?
An SBA 7a loan is a loan guaranteed by the Small Business Administration, a government agency whose purpose is to promote small businesses in the United States.
A lot more businesses can qualify for SBA loans than you might think. If your company has less than $15 million net worth and $5 million average, after-tax net income over the last two years, you may not think of yourself as a “small business”, but you qualify under SBA rules.
Because SBA 7a loans have a partial government guarantee, the rates are very competitive. However, the process of applying can be more complicated than other loans because the borrower must meet both the government’s AND the lender’s criteria.
SBA loans are loans provided by banks and non-banks. Because a portion of the loan is guaranteed by the U.S. Small Business Administration, SBA lenders must comply with the SBA’s credit and operations guidelines.
Experienced SBA lenders can be designated as SBA preferred lending partners (PLPs) and have delegated authority to lend under the SBA program (rather than having the SBA review every loan prior to funding.)
If you qualify, SBA loans are a perfect solution for businesses looking to expand or improve their operations, acquire other businesses, or purchase owner-occupied commercial real estate.
An advisor like Speritas Capital can match you with the right SBA preferred lender for your industry, loan size and needs – and we help with documentation.
So, how exactly can you use an SBA loan?
SBA Loans for Business Acquisition, Including Franchises
Using an SBA 7a loan, you can acquire another business, acquire a franchise, acquire additional franchises, or even buy a business partner out.
To take out a loan to acquire an existing company, the target business must be financially stable and able to generate cash flow to repay the debt.
Lenders usually prefer the business to have been operating for 2+ years, but start-ups can be approved in some cases. Business acquisition loans have maturities up to 10 years.
SBA 7(a) Loans for Business Improvement and Expansion
An SBA loan can give you the working capital you need for a variety of small business operations, accounts payable, increased staffing, inventory, and supplies. Certain businesses can also use it as a long term, revolving line of credit. Working capital SBA 7a loans can have terms of 5 to 7 years.
You can use an SBA loan to purchase or lease equipment, machinery, furniture and more. With an SBA 7a loan, you can finance your equipment with terms of up to 10 years.
Renovating your space is also a good purpose for an SBA loan. Leasehold improvements can be financed up to 10 years.
If the loan falls under multiple categories, a weighted average of terms will be used.
An up-and-coming custom coffee roaster in NY wanted to expand their production space to include a coffee bar for classes, training, and events. The expansion would cost $200,000.
Given the size of the company and the purpose of the loan, we recommended a cost-effective SBA loan.
We identified a bank that would be a good lender, assisted with documentation, submitted an application, and got approved. Our coffee roaster ended up with a 10-year loan at a competitive interest rate.
SBA Loans for Commercial Real Estate
An SBA loan can be a great way to purchase commercial real estate for your business to occupy. But, your business must occupy the majority (at least 51%) of the square footage of the building, which means you can’t use it for “fix-n-flip”.
Self-storage and hospitality are exceptions to the owner-occupied rule and are eligible for financing.
Real estate loans have maturities up to 25 years.
SBA loans can be used to purchase a business along with its real estate. In this case, the maturity of the SBA loan will be a weighted average of the business and real estate property values.
Qualifying commercial real estate properties include:
- Warehouses and factory spaces
- Office and professional buildings
- Auto repair shops and dealerships
- Farms and agricultural facilities
- Medical facilities and nursing homes
Who Can Qualify for an SBA 7a Loan?
Only small businesses, as the SBA defines them, are eligible for SBA loans. This means your business must have a tangible net worth less than $15 million and an average after-tax net income of less than $5 million for the previous two years.
To qualify for an SBA loan, you first need to have a feasible business plan and relevant management experience for the business you operate or plan to operate. Additionally, you need good credit, generally a FICO score of 650 or higher.
We will help you determine if you meet SBA loan requirements, identify the right lender, tell your story, and lead you through the documentation process.
- Be located in the U.S. or its possessions
- Not have access to other sources of funding
- Not be delinquent in existing debt obligations
Also, the SBA prohibits loans to banks or other lenders, life insurance companies, certain private clubs, religious organizations, or businesss involved primarily in gambling, speculation, or political lobbying.
What do you need to qualify for an SBA loan?
The main ingredients to a good SBA loan application are:
- having the required equity contribution;
- strong cash flow in the target or expanding business;
- if acquisition, relevant experience in the target industry or a reasonable seller transition;
- if real estate acquisition, appraised value supporting up to 90% loan-to-value;
- good credit – generally 700 or higher, but lenders will consider one-time negative events that impact credit.
SBA guidelines require the borrower to contribute at least 10% of the total project cost. This should come from cash or savings and in some cases from home equity lines of credit. A combination of seller financing and an SBA loan can make up the other 90%. Seller notes often have to be on subordinated to the SBA loan and on “standby” for a period of time.
Strong cash flow
SBA lenders look for steady or increasing pre-tax earnings, adjusted for interest and non-cash items like depreciation and amortization. SBA lenders “underwrite” potential loans with a debt service coverage ratio of 1.25, meaning that earnings must be 1.25 times the amount of annual principal and interest payments.
If you’re acquiring a business, you need to have relevant experience. That experience could be in the same industry as the business being purchased or could be more general business management. A seller transition period can help when experience is limited.
Your business and personal credit must be relatively strong. Most SBA lenders require a credit score of 680 or above. SBA loans can be arranged with credit scores as low as 600 but this is more difficult. A personal guarantee is required from at least 1 owner with 20% or more ownership.
Personal Financial Strength
SBA lenders are generally required to take all business assets as collateral. For loans over $1 million, the lender is required to put a lien on the personal real estate property of all 20% or greater owners. The business and personal assets combined with the business cash flow factor into the SBA lender’s calculation of whether you can pay back the loan.
Most people looking to buy or expand a small business don’t realize that SBA 7a and 504 loans can be a great option.
In 2020, the SBA approved 43,302 7(a) loans totaling $22.6 billion dollars. The average approved amount was $533K. SBA loan amounts have increased each year over the last 5 years and 2021 looks to be another growth year.
SBA loans can be a great fit for businesses looking to expand their operations, acquire other businesses, buy equipment or purchase owner-occupied commercial real estate. The main SBA program (7a) goes up to $5 million while the SBA 504 program for real estate goes up to over $20 million.
So Why are SBA loans a Good Option?
- Broad eligibility
- Flexible structures
- Preferred lenders with delegated authority to approve loans and close quickly
Reason One – Broad SBA Eligibility
SBA loans—loans guaranteed by the Small Business Administration—are not just for mom and pop stores.
If a business has less than $15 million in tangible net worth and $5 million in average, after-tax net income over the last two years, the business may qualify as a “small business” for the SBA and can be acquired using the SBA programs.
Eligible businesses can also use SBA loans to purchase owner-occupied real estate (51% or more occupied) and to expand their working capital and products and services.
Reason Two – SBA Flexibility
The SBA recently reduced the amount of equity a buyer had to contribute in a an acquisition from 20-25% to 10%.
That equity can be combined with a seller note. So a buyer could bring 10% to the table and either get 90% financing through an SBA loan or add a seller note if the lender won’t go to 90%. Read more about equity injection options that meet the SBA’s requirements.
See how we took advantage of this flexibility in a recently-funded $5 million franchise acquisition.
Reason Three – SBA Preferred Lenders
Preferred lenders have delegated authority to approve loans without submitting the file for SBA underwriting.
Preferred lenders come in many sizes and shapes, from big banks to community banks to nonbank, private lenders. Each lender has their own approach to SBA lending. Larger banks tend to be more conservative, while smaller banks and nonbank lenders tend to be more flexible.
That flexibility could mean more reliance on projections rather than tax returns, or more willingness to look past one-off credit issues.
Borrowers who complain about slow closings are usually NOT using an SBA preferred lender.
You need a strategic, cost effective solution to your financing needs and a finance advisor you can trust. And one that never takes upfront fees. Let us put our decades of banking and structuring experience to work for you – email Speritas Capital Partners about your eligibility for an SBA 7(a) loan today.
Call/text Jeff Bardos, CEO
directly at 203-247-4358
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