SBA 504
Q: What can a SBA 504 Loan be used for?
A: In general, only to acquire or improve fixed assets with a useful economic life of ten or more years. Most projects include the acquisition and/or improvement of one or more of the following:
- Land and/or an existing building
- Land and construction of a new building (Buildings on leased land are also eligible)
- Commercial condominiums
- Project related machinery and equipment
- Projected related soft costs
Q: Is my business eligible for SBA 504 financing?
A: Over 95% of the nation’s companies are classified as “small businesses” by SBA standards. Limitations are set by total revenues and number of employees according to industry. Almost every type of business qualifies for SBA financing: manufacturing, wholesale, service, retail. Loans cannot be made to speculative businesses, media businesses or businesses engaged in gambling activities.
Q: Is there a minimum or maximum Total Project Cost?
A: There is no statutory limit on the total project cost, though SBA 504 projects larger than about $10,000,000 are uncommon. Many people are surprised to learn that projects may be as small as $250,000.
Q: Does Six Bridges Capital Corporation provide all of the financing?
A: No. In every project there will be two loans, one from Six Bridges Capital Corporation (6BCC) and the other from the participating 1st REM lender. Typically, 6BCC finances 40% secured with a 2ndREM/UCC and the participating lender finances 50% with a 1st REM/UCC (the remaining 10% coming from the borrower).
Q: How much can I borrow?
A: The total of all loans from 6 Bridges Capital Corporation to a single borrower may not exceed $5,000,000 at any one time ($5,500,000 for a manufacturer). 6BCC’s share of any one project cannot exceed 40% of the actual Total Project Cost. In other words, for projects with a Total Project Cost from $250,000 to about $12,500,000 (or $13,750,000 for manufacturing), 6 Bridges Capital Corporation can finance 40% and the participating lender will finance 50%. For projects larger than $12,500,000, 6BCC’s share is maxed at $5,000,000 (or $5,500,000 for manufacturing), but the participating lender will ‘pick up the difference’ so that 90% financing can be provided.
Q: Is it always 90% financing?
A: No. There are two conditions that require the borrower to increase the equity contribution by 5% or 10% for both (which reduces the 6 Bridges Capital Corporation loan by 5% or 10% for both):
- The real estate is deemed to be ‘single purpose’, e.g., gas station, ice skating rink, car wash
- The business is deemed to be a startup (a business acquisition involving a change of management is also considered a startup)
Q: How does the pricing compare with conventional bank financing?
A: There is no comparison. To the best of our knowledge, conventional lenders do not offer a twenty year fixed rate loan. Some lenders will fix their rate for 3 – 7 years but if you are interested in a 20 year fixed rate then a SBA 504 loan is a great option. The interest rate that the participating lender will offer is usually very competitive given that the lender has a first mortgage with a 50% loan to cost. Therefore, since their risk is less their pricing can be very competitive.
Q: What is the cost?
A: There are no out of pocket expenses to obtain a SBA 504 loan. The fees are all rolled into the loan and are included in the effective rate that is quoted to you.
Q: Are there prepayment penalties?
A: Yes. There is a declining prepayment penalty during the first 10 years. Years 11-20 there are no prepayment penalties. However, during the first 10 years, 6 Bridges Capital Corporation can allow the loan to be assumed if the fixed asset is sold. This is especially helpful if you closed your loan in a low rate environment and sold it when the interest rate was higher.
Q: Are all types of businesses eligible?
A: Almost all types are eligible. The only types of businesses typically excluded are not-for-profits and businesses whose primary source of revenue is from gambling, lending, or the production or distribution of material considered to be sexually prurient.
Q: Are SBA 504 loans for small business only?
A: Yes but a small business is probably much larger than you thought. So long as the net worth of the business is less than $15,000,000 and the net profit after tax averaged over the last two years is less than $5,000,000, the business is small enough for a SBA 504 loan. Even if a business exceeds these measures, it still might be considered small. For example, a manufacturer that employees 500 or fewer persons is always considered a small business.
Q: Are personal guarantees required?
A: Yes. Any person who owns or controls 20% or more of the ownership of the business or 20% or more of the real estate (assuming the real estate is held in a separate legal entity) must personally guarantee the SBA 504 loan. In the case of a married couple where both spouses have an ownership interest, the couple is treated as one person, e.g., if both spouses own 10% each, both must guarantee. In certain circumstances, persons with less than a 20% ownership may also be required to personally guarantee.
Q: I have an excellent relationship with my bank. Must I change banks?
A: Absolutely not. We know the importance of building and maintaining a strong banking relationship. You decide who the participating lender is. (Just about every lender in our service area has participated with 6BCC.)
Q: How long is the approval process?
A: 6 Bridges Capital Corporation prefers working in conjunction with the first mortgage lender to provide an answer at the same time. Typically the approval process is three weeks from the time that all of the information has been provided to 6BCC.
Q: Do I need to get two appraisals and two environmental studies?
A: No. We work with the banks to let them know our standards prior to the time that the appraisals and environmental studies are ordered. This way the bank and 6 Bridges Capital Corporation can utilize the same report and the borrower only has to pay once for the reports.
SBA 7(a)
Q: What are the advantages of SBA financing for a small business?
A: Simply put, a longer term means lower payments. Lower payments allow the business to retain and utilize more working capital, which is essential for a growing business. Additionally, all SBA loans are fully amortized. Therefore, the business will not be impacted with renewal fees, interim appraisal costs or untimely balloon payments.
Q: Is my business eligible for SBA financing?
A: Over 95% of the nation’s companies are classified as “small businesses” by SBA standards. Limitations are set by total revenues and number of employees according to industry. Almost every type of business qualifies for SBA financing: manufacturing, wholesale, service, retail. Loans cannot be made to speculative businesses, media businesses or businesses engaged in gambling activities.
Q: How much can I borrow?
A: Arkansas Capital Corporation offers SBA 7(a) financing up to $5 million.
Q: What can the funds be used for?
A: SBA Guaranteed Loans can be used for virtually any legitimate business purpose. Examples include: Purchase real estate, make improvements to business property, purchase equipment, expand a business, consolidate debts, purchase another business, construct a new facility and finance a franchise.
Q: Aren’t SBA guaranteed small business loans only for businesses that are not creditworthy by traditional banking standards?
A: On the contrary, SBA financing will not be extended to any business that does not demonstrate the ability to repay debts. The longer terms allowed with SBA guaranteed financing can enable a small business easier debt qualification based on lower payments.
Q: What amount of equity will be expected in any financing request?
A: For an existing business, borrower equity can be as little as 10%, depending on creditworthiness. Start-up businesses are required to contribute between 20% and 30% of the total project costs. Equity injection is typically cash.
Q: What else do I need to know?
A:
- Sufficient cash flow to meet proposed debt service
- Personal guarantees are required
- Hazard insurance is required
- Current appraisals are required on real estate collateral
- Assignment of life insurance is required on key individuals
Q: Will the government be looking over my shoulder for the duration of my loan?
A: As with any commercial loan, the lender, rather than the government, monitors and services the loan. The government’s involvement relates to the guarantee only in the event of default.
Q: What are some common myths about SBA financing?
A:
- It does not take 6 to 9 months to get funded. On average, it takes 60 days to process an SBA loan from submission to final funding.
- You do not have to be “turned down” by a bank prior to applying for an SBA loan.
Q: Can SBA loans be used to refinance existing business debt?
A: Yes, but certain criterion applies.
Q: Can SBA financing be used for construction?
A: Yes, as long as the business will occupy at least 60% of the new building. The construction loan will convert to a fully amortized loan at the end of the construction. If an existing building is financed or refinanced, your business must occupy at least 51% of the facility.
Q: What costs are associated with an SBA loan?
A: By statute, the maximum interest rate that can be charged is 2.75% over the National Prime Rate for loans with maturities of seven years or more, and 2.25% over the National Prime Rate for loans with maturities of less than seven years. The SBA itself charges a guarantee fee based on the loan amount, which is the only cost associated with the benefits of long term SBA borrowing. This fee can be financed as part of the loan proceeds.
Q: How long will I have to wait for a decision on my application?
A: Qualified applicants are given a Proposal Letter outlining major points of the loan. Upon receipt of all required information and the executed Proposal Letter from the applicant, the formal underwriting will begin with presentation at the next loan committee. Arkansas Capital Corporation’s loan committee regularly meets twice each month.
Q: What are the general collateral requirements?
A: SBA does not permit its guaranty to be used as a substitute for available collateral. SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.
Q: What does Arkansas Capital Corporation look for in a successful borrower?
A: After determining which loan product best fits the applicant’s needs, Arkansas Capital Corporation will analyze the loan application information based upon a combination of several factors, which include:
Cash Flow Coverage
Cash flow sufficient to cover business debt service is required. Cash flow coverage is determined after owner’s withdrawals or officers’ salaries, existing debt service and proposed debt service have been deducted. A sufficient amount of living expenses will be considered for sole proprietorships. Fluctuations in cash flow coverage must be explained.
Debt To Worth Ratio/Capital
Generally, a debt to worth ratio of 4:1 or better is expected, and required for start-up businesses. This ratio indicates the equity within the business, or what the owners have at risk. In cases where the debt to worth ratio is manipulated through forgiveness of debt, standby debt and market value balance sheet adjustments, explanations are required.
Collateral
SBA does not permit its guaranty to be used as a substitute for available collateral. SBA requires that the lender collateralize the loan to the maximum extent possible (on a discounted basis) up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.
Management
The amount of management’s direct experience in the business can determine the overall viability of the loan request. Financial statements of existing businesses help indicate management’s abilities. Information should also be submitted on key management and guarantors, duties and responsibilities. For start-up businesses, resumes should be detailed enough to explain past history and how it relates to the start-up business.
Credit History
The borrower’s personal and business credit history are considered. Credit blemishes must be explained in order to justify continued credit consideration.
Conditions
The business owner should also be prepared to address other conditions of their loan request that may affect the success of the business, such as industry trends, seasonality, location and competition.
