SBA Loans for Commercial Property, Business Purchase, Working Capital, Debt Consolidation & More
The SBA 7a loan is very flexible and can be used for "any legitimate business purpose."
The maximum 7a loan is $5 million* and a business can have a tangible net worth of up to $15 million and net (after tax) income up to $5 million and still qualify.
*some lenders can put a small conventional loan behind a $5 million SBA 7a to finance larger transactions.
SBA 7a Loan Program Information and Eligible Uses
7a loans can be used for most business purposes, including:
- 100% financing for a business expansion
- Buying a Business with 5% or 10% Down
- Purchase, construction or renovation of a building for an existing business with NO down payment - including ground up construction of a new building, major renovation or purchase of additional real estate to used by the business
- Refinance of Business Debt
- Working Capital
- Partner Buyout
- Tenant Improvements
- Equipment Financing
- Purchase of Inventory
Buying a Business / Financing Goodwill
The 7a can be used to buy a business. Typically, the max loan is 10 years if just financing goodwill / blue sky / intangible assets. If there is some long life equipment included then longer term amortizations are possible, and if commercial property is included it could be as much as 25 years.
SBA 7a Loan Down Payment
The 7a program has no down payment requirement for certain real estate transactions, but as of January 1, 2018, the SBA has a 10% down payment requirement for a business purchase, although it is possible to purchase a business with only 5% down if the seller of the business is willing to hold a second mortgage for 5% of the sales price with no payments to be made for as long as you have the SBA 7a loan. (Many sellers are willing to do this).
In some cases, some lenders may want more than 10% down payment depending on all of the factors involved or if there is something about the transaction that is not right in line with their guidelines, but for most businesses 10% is enough.
Prior to Janaury 1, 2018 there were exceptions to the 10% down payment requirement as some lenders would consider 100% financing for industries with very low historical default rates and/or an individual business with extremely strong cash flow, but 10% is now the minimum equity injection.
25 Year Fixed Rate Commercial Real Estate Financing
25 year fixed rate loans are available for owner occupied commercial properties at very competitive rates for solid businesses. The required down payment for the 25 year fixed will vary - it could be as little as 10% for stronger borrowers. You will need good credit and the business must have solid, consistent cash flow.
Please contact us at 1-800-414-5285 for details on what it takes to qualify. (Most property types are eligible).
100% financing is available with the 7a for established businesses purchasing, refinancing or constructing general purpose or multi-use buildings. You will also need good credit, solid, consistent cash flow. You can read more about it here.
100% 7a for Medical, Dental and Veterinary Practices
The 7a and the 504 are some of the only commercial loans available for those who do not have a lot of equity or a large down payment. 7a loans are available up to 100% loan to value for many different types of businesses including:
- Medical practice
- Dental practices
- Veterinary clinics
- Independent pharmacies
- Funeral homes
- Physical Therapy a Rehab Clinic
- Auto Repair facilities
- Numerous Franchises
By contrast, the 504 loan is for real estate and equipment only and requires at least 10% down or 10% equity, although technically you can pledge equity from another eligible commercial property and also possibly borrow the down payment as long as the borrowed debt does not negatively impact your business.
The 7a loan may also be your best option to refinance your current business or commercial real estate loan (possibly up to 25 years). Among other things, it can be used to refinance the following types of business debt:
- Long term debt with a balloon
- Business credit card debt – as long as you can show it was used for business purposes
- Revolving lines of credit
- High Rate/Floating rate SBA 7a loans (for more info see below)
25 Year Fully Amortizing Loans for Commercial Real Estate
7a loans that include real estate are typically easier to qualfiy for and also easier to get higher leverage with, since lenders are more comfortable using a commercial building as collateral.
The major advantage of the 7a over most other commercial loans is that if business real estate is the largest percentage of the new loan then a 25 year amortization is possible.
Loans that do not include commercial real estate (like business acquisitions) or loans that are "under collateralized" can also be funded as long as a lender can get comfortable with the transaction. Cash flow - or in some cases, projected cash flow - is the most important factor to consider for lenders.
Gift Funds and Borrowing the Down Payment
The 7a program is also flexible with regard to the source of the down payment as it allows gifts from family members, borrowed funds, investors, retirement account rollovers, equity in other business or personal property and in some cases, even balance sheet equity.
Borrowed funds using another asset (i.e. a home equity line) are allowed as long as you can show you have the ability to repay the borrowed funds from another source (not from the business you are purchasing). Acceptable sources could be another business or job you have or income from a spouse.
Additional Sources of Down Payment for an SBA 7a Loan
In addition to the above, the 7a is also fairly flexible with regard to equity contributions from the seller.
The SBA allows equity in the form of a second mortgage from the seller of the business. They allow the seller of the business to take back a second mortgage as equity IF the second mortgage is on what is called "Full Standby" for life of the loan. Full standy means that no payments can be made for as long as the borrower has the SBA loan - although interest can accrue during this period.
In some cases, a transaction will be structured with a seller held loan on full standby for equity/down payment requirements AND another seller held debt with "repayment terms" in order to reduce the lender's exposure on a transaction. We see this fairly frequently when a borower is buying a business that does not quite have strong enough cash flow, but the buyer has a plan and realistic projections to improve the cash flow.
These additional seller held debts serve to reduce the lenders risk and are sometimes the key to getting a loan approved.
Recent Creative Funding:
Client purchased a manufacturing business and building for $5 million with $6500 out of pocket, a seller held 2nd mortgage, an SBA loan of $2 million that we arranged and a $2 million accounts receivable and inventory line that we arranged. Client worked as CFO for the business for many years and was intimately familiar with every aspect of the business, so the lenders were able to be flexible in the financing structure.
Please call us at 1-800-414-5285 for more info about 100% financing with the 7a or leveraging equity in another property.
10% Down Payment for Business Purchase (more info)
A down payment of 10% is required for a business purchase using the SBA 7a loan where no real estate is included, however 100% financing is available for existing businesses (especially larger franchises) where the business/franchise is expanding to a new location. See our 100% commercial loans page here for more details.
SBA will typically limit the term of a non-real estate loan to 10 years although 15 year terms are possible. SBA also requires that any building leases will last for (or at least has options for) the term of the loan.
Please note: the Small Business Administration does not make loans. They provide the guidelines for what can be done and they provide a guarantee most of a 7a loan for a lender, but you still have to rely on a bank or an SBA approved lender to secure financing.
Please contact us at 1-800-414-5285 for clarification on any of the above.
More SBA Eligibility
The 7a loan limit of $5 million is not only a maximum loan amount, but it also serves as a maximum threshold for eligibility because the SBA uses the same figure to determine how much SBA eligibility a business owner can have.
In other words, you can have just one loan of $5 million or you can have multiple loans totaling $5 million. This is significant for those in need of additional financing to either purchase or refinance additional businesses or locations.
If you need more than $5 million in SBA eligibility and you are buying real estate or heavy equipment, then consider the 504 loan program or the "Green 504" program. The "regular" 504 can now be used for projects in the $12 to $20 million range and the Energy Efficient/Green 504 can accommodate multiple projects using maximum financing with a cap of $16 million in eligibility for the same borrower/business.
7a Loan Rates
SBA 7a loan rates are typically Prime plus a margin not to exceed 2.75% and the rate you can expect to receive is typically based on the strength of your loan.
Some lenders will offer attractive 3, 5 or 10 year fixed rates and even 25 year fixed rates are available for some of the stronger transactions.
Minimum Credit Score
The SBA has NO minimum credit score for 7a or 504 loans over $350K and some 7a lenders in particular, can be quite flexible with what they will accept - within reason.
You can still get an SBA loan with a low credit score, BUT you will need to have a very good explanation for why the score is low.
It is also possible to get an SBA loan with a bankruptcy as long as enough time has passed and again, as long as you can provide a very good explanation for what happened.
The 7a loan is an attractive option for lenders because:
- Banks and lenders can sell the SBA guaranty for premium (profit) on the secondary market.
- 7a loans offer a 50% to 90% guarantee from the SBA which reduces the required capital and reserves a bank needs to make a loan which, in turn, enables banks to do more lending.
The 504 loan, while an excellent low risk loan still has some risk for a lender, because the SBA guaranty only covers the SBA debenture (or second mortgage) and in the case of default the bank is on the hook for the amount of the first mortgage - typically 50% of the total project cost.
Of Note: No Financial Covenants
Keep in mind that 7a loans rarely have the types of "financial covenants" that haunted businesses a few years ago, so if the economy hits another recession and property values were to drop it would be highly unusual for you to lose your property because you no longer have enough equity as long as you make your payments.
Unfortunately, this happened to many businesses with conventional loans during the Great Recession. Businesses who were making their payments on time still lost their buildings because their banks needed them to have more equity to satisfy regulators and called their loans due.
This would be unusual with an SBA loan as it is extremely rare for a bank or lender to impose covenants related to cash flow coverage and other financial ratios once the loan is closed. The key issue is that you make your payments on time.
Please contact us at 1-800-414-5285 if you need more information re: qualifying, eligibility under the new guidelines or timing for approval with the SBA 7a Loan.
Alternatives to SBA Financing
Even if you meet SBA approval guidelines, there is still no guarantee that you will find financing in the current credit environment. Banks and lenders are still extremely risk averse and the reality is that some good loans are not being approved. There is an alternative however..."Asset Based Loans."
Asset Based Loans are an alternative to SBA lending where a lender secures the loan with an asset - anything from purchase orders, to accounts receivable to equipment or inventory and some programs are available for A through D credit.
If we are unable to help you with SBA financing one of these alternatives may be possible:
- Accounts Receivable Financing
- Equipment Financing and Leasing
- Purchase Order Financing
- Financial Contract Amortization
- Service Contract Amortization
- Medical Equipment Financing
- Merchant Credit Card Advance Lending
- Construction Project Financing
- Tenant Improvement Financing
Please remember, in most cases we do not charge a fee for assisting you with either an SBA 7a loan or an Asset Based Loan. Please contact us if you have any questions about how to qualify for either.
You can call us toll free at 1-800-414-5285