3 Reasons an SBA 7a or 504 Loan is a Fit for your Funding Needs
Three Reasons Why an SBA Loan is a Fit for Your Funding Needs
By Jeff Bardos, CEO, Speritas Capital Partners
December 7, 2018 – Greenwich, Connecticut
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 fact, over 68,000 SBA loans totaling over $30 billion were funded in 2017. SBA loan amounts have increased each year over the last 5 years and 2018 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.
Why are SBA loans a good option?
Three reasons: broad eligibility, flexible structures, and preferred lenders with delegated authority to approve loans and close quickly.
Reason One – 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%. 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.
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.
Learn more about SBA loans by reading our SBA loan white paper.
This post just scratched the surface of why borrowers should consider an SBA loan. Every situation is unique. I’m happy to address your specific business and borrowing needs in a call. My contact info is below.
About the Author
Jeff Bardos, CEO, Speritas Capital Partners
Jeff has over 25 years of experience in the financial services industry. After graduating from the Columbia Business School, he joined the New York Federal Reserve Bank as a senior staff member in Bank Supervision, leading the Bank Analysis department. From the nation’s central bank, Jeff moved into the private sector, working at senior levels in commercial banking, retail banking and risk management. He has also played senior founding roles in several start-ups. Learn more about Jeff.
Speritas Capital Partners specializes in difficult credit, collateral and cash flow situations and we never take upfront fees.