The owner would receive this loan from a local bank and would make payments to that bank. The borrower and lender would establish terms such as the interest rate and minimum payments between themselves, subject to caps set by the standard 7 a loan program.
Except for emergency or disaster relief , all SBA loans work this way: The bank lends and the agency backs and guarantees loans. This makes it easier for small businesses and entrepreneurs to borrow money, because they effectively have the federal government as a cosigner. The full name of this program is the Certified Development Loan Program, and it offers long-term, fixed-rate financing for small businesses.
It is designed as a low-capital way for businesses to buy new real estate or heavy equipment, allowing them to expand or repair their operations without having to seriously hurt their cash flow.
The borrower cannot use this money for overhead, payroll, debt servicing, inventory or any other general operating expenses. It can only be used on major, fixed assets such as real estate or heavy equipment. Per an SBA guidance , examples of acceptable loan expenses include:. A loan is issued on a three-way split. The underlying project is collateral for this loan, which lets the SBA and the third-party lender offer more generous terms and typically makes it easier for banks to finance this loan as there is an asset securing the loan itself.
The SBA runs its loan program for two reasons. The first is small business expansion. This program allows borrowers to grow their businesses more easily than they otherwise could, by providing them with the capital to buy major equipment and operating space. Learn how real businesses are staying relevant and profitable and are even growing in a world that faces new challenges every day.
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It's a badge of pride to qualify for a real estate loan from your bank. It means the bank picked you up by your ankles, held you upside down to shake out all your lunch money, and you still survived. The borrower then covers the remainder of project costs.
The CDC can place its loan in the second collateral position meaning it's paid out by a foreclosed collateral sale after the first position lender is made whole because its loan is guaranteed by the SBA.
There are a variety of uses for loans, but since they're typically structured based on collateral value, they're almost always used to purchase or improve real estate. SBA loan eligibility is a little easier than SBA 7 a eligibility, especially if the business is minority-owned. Many strong businesses apply for an SBA to get better loan terms.
Most conventional real estate purchase loans have a 5-year or year term with a balloon at the end. The bank will calculate your monthly payment based on a year or year term, and then whatever is left over when the year term is up comes due in one big lump-sum payment.
The first loan the loan from the conventional lender term will be up to 25 years and the debenture term will be 20 years. Some CDCs are offering year terms. Conventional real estate loans are often tied to the Wall St. That means after five years, the rate would adjust to whatever the current prime rate is, plus the 2.
The first loan will probably have the same rate as the conventional lender offers on any other real estate loan. Debenture rates are the killer. You won't see loan rates for commercial real estate. This also works to help businesses with lower cash flow and cash qualify for the loan. That LTV is based on the appraised value of the property, not the project costs.
You have to come up with the difference between the loan amount and the purchase price, plus all closing costs. Talk to your local CDC about the requirements. Some of them can be worked around: if you have a minority- or woman-owned business or if you add energy savings items to your project. The first step is to talk to your normal business banker about a loan. Also, be wary of bankers who immediately try to talk you out of doing a loan. Underwriting is the annoying part. Be prepared to be put through the wringer and provide the following items:.
The bank will also pull your personal credit, order an appraisal, and potentially order a LexisNexis report on your business. One more thing: because you will technically have two loans, you have to go through underwriting twice. The bank and the CDC need to approve your loan. A good CDC will be working concurrently with the bank to get their own underwriting done far ahead of time.
Your bank should close the first loan along with a short-term bridge loan, with interest-only payments, that will be paid off by the debenture when it closes. For a good CDC, this should take three months max. If your project includes construction, the CDC will not pay off the bridge loan until the project is complete.
Most banks will do a bridge loan for the full amount during the construction period. The final step is closing the CDC loan and paying off the conventional bridge note.
Once this is done, you can start making your two monthly payments. There are pros and cons to each, and as we mentioned before, you may not be able to trust your banker to be completely clear with you.
But there is the opportunity to get a much lower fixed rate with a loan. You will make one payment to your conventional lender and one to the CDC. Both will send you monthly statements. Keep all your options open the next time you buy a building. Knowing how to build a strong virtual team is more important today than ever -- and there are six critical things you must do to succeed. That's why we've created this ultra-timely page report on what you should be doing now to set your virtual team up to win.
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