Blog

SBA 7A & 504 Loan Benefits

Maura Cannon : October 16, 2017 3:29 pm : Uncategorized

The Small Business Administration (SBA) was established in 1953 and is a government agency that provides a variety of loan products and services to benefit U.S. based small businesses. The two main loan programs the SBA offers partially guaranty loans made to small businesses by approved and participating lenders, such as banks and finance companies. The guarantees provided by the SBA help lenders make loans to borrowers that would not have access to conventional financing under similar terms and conditions, encouraging them to take a risk on a smaller business.

The SBA 7A loan program is the most popular for helping start-up and existing small businesses. To be eligible for this program, the business must meet size standards and be considered small within their particular industry. In addition, they must operate for profit, be engaged in doing business in the United States, have reasonable equity to be able to invest (minimally 10%), and must have tried to use other financial resources, including personal assets, before applying for a loan. An SBA 7A loan can be used to purchase new land, repair existing capital assets, purchase or expand an existing business, refinance existing debt, provide working capital and purchase machinery, furniture, fixtures, supplies or materials. A Bank will make the loan with this program, while the SBA guarantees 75% of the loan amount, providing the Bank a guaranty that a large portion of the principal will be repaid if the loan goes into default.

Benefits of the SBA 7A Program

  • Flexible structure
  • Up to 90% financing
  • Lower down payment compared to other financing options
  • Lower monthly payments
  • Offer variable and fixed-rates
  • Loan terms of 5 to 25 years:
    • 5 to 7 year term for working capital
    • Up to 10 years for business acquisition or equipment financing
    • Up to 25 years for real estate
  • Soft costs such as goodwill, franchise fees and closing costs eligible
  • The SBA will loan on the “value” of the business, even if the collateral does not add up to 100% of the loan amount, and in some cases will fund deals with no hard collateral at all.
  • Due to the loan being largely guaranteed, the Bank will take on an asset type they might not normally want to do. Some examples of these high risker businesses include hotels, restaurants and gas stations.
  • Specialized programs available for exporting; underserved communities; military and working capital needs

The SBA 504 loan program is an economic development loan program that offers small businesses another avenue for business financing, while promoting business growth and job creation. This program is made available through Certified Development Companies (CDCs), who work with the SBA and participating lenders to provide financing to small businesses. There are over 270 CDC offices nationwide, each having a defined area of operations covering a specific geographic area. Through this program, a business must typically create or retain one job for every $65,000 in funds guaranteed by the SBA. Eligible businesses for the SBA 504 program must also meet size standards and operate for profit. A business qualifies if it has a tangible net worth not more than $15 million and an average net income of $5 million or less after federal income taxes for the proceeding two years prior to application. SBA 504 loans are used for purchasing real estate, renovations / improvements to existing real estate, and equipment financing. A Bank will lend 50% of the total project cost and be in 1st position on the mortgage; the CDC will lend 40% of the total project cost and be in 2nd position on the mortgage; and the Borrower will be responsible for supporting the remaining 10% of project costs. The Bank will fully fund both portions of the loan at the time of closing until the CDC raises the funds through a bond sale to fund its portion, which can take anywhere from 30 days to 6 months after closing.

Benefits of the SBA 504 Program

  • Flexible structure
  • 90% financing
  • Lower down payment compared to other financing options
  • Lower monthly payments
  • Competitive fixed rate for 20 years on the SBA portion of the loan
  • Loan terms of 10 or 20 years available
    • 10 years for fixed assets / equipment
    • 20 years for real estate
  • Bank must provide a 10 year term (rather than typical 5 year balloon), with at least a 20 year amortization.
  • Bank may take on loans to higher risk or newer businesses due to their low LTV

What can you expect if you decide to explore an SBA loan to meet your small business needs?

  • All SBA loans require personal guarantees of the owners with 20% or more ownership interest in the business.
  • More documentation is involved with an SBA loan than with a traditional lender, as they are backed by the US government.
  • Anticipate the process to take a bit longer than a traditional loan, with typical approval to close times of anywhere from 45 to 90 days.
  • An SBA loan application has to first be approved and underwritten by the financial institution or small business lender prior to being sent to the SBA for underwriting and approval. If both organizations approve the loan, the financial institution will fund and service the loan.  In the case of SBA 7A loans, some Banks are approved underwriters, so once the Bank approves the loan it is automatically approved with the SBA.
  • SBA Fees – can be rolled into the overall loan
    • 7A – 3% guaranty fee based on the guaranteed portion of the loan (typically 75% of the loan amount)
    • 504 – 3% fee on the SBA portion, called the debenture

Is an SBA loan the right move for your business? For many businesses the benefits outweigh the costs. The SBA’s mission is to help start, build and grow businesses. Be sure to do your research, read the paperwork and know what you are getting into. SBA loans can be a great means for new entrepreneurs to secure needed capital; or for businesses without sufficient collateral to obtain the loan they need; and the longer terms and amortizations are very beneficial in helping businesses to improve their overall cash flow, allowing the business to keep their cash for working capital to grow their business.

Comments are closed

Equipment Financing – What is the best option for your business?

Maura Cannon : June 19, 2017 1:55 pm : Uncategorized

As a business owner, you may be acutely aware of how equipment can play a critical role in the operation and success of your company. Equipment can include anything from phone systems, computer monitors, printers and copiers to furniture, restaurant ovens, cookware, medical machinery, industrial equipment and more. So how does one purchase, replace, repair or upgrade the various equipment that is essential to process, manufacture or produce your product? Some business owners may not have the cash to outright purchase equipment, or maybe they do not want to tie up all their working capital. There are two options business owners have when it comes to financing equipment, take out a loan to purchase the equipment or lease the equipment. So which one is right for your business?

First, let’s get back to basics. Equipment financing is any method of extending capital to a business for the purpose of acquiring equipment. What is an equipment loan versus an equipment lease? An equipment loan is a loan to purchase any piece of business equipment, which is secured by the equipment itself. Your business owns the equipment and reports it as an asset on the balance sheet. The lender provides the lump sum to purchase the equipment, which you pay back over time with interest. If you fail to pay the loan, the lender can repossess the equipment. An equipment lease on the other hand, is essentially an agreement to rent the equipment. You make monthly payments to keep the equipment in your possession and at the end of the agreement, you will have the option to renew or end the lease, or have an option to purchase the equipment at market value. There are benefits and drawbacks to both; the key is to choose the option that makes the most sense for your business.

What are the key benefits of an equipment loan? Equipment loans are relatively quick to obtain, usually in just a few days, and require less documentation than a traditional loan since the equipment will be the collateral. This can be good for both start-up businesses and expanding businesses. Equipment loans allow business owners to keep more cash on hand to meet working capital needs. Some form of down payment typically is required, and there will be principal and interest payments to pay back the loan over time, however payment terms can be flexible with monthly, seasonal or even quarterly payments. There are also tax incentives of up to $500,000, which allows for some, or in some cases all, of the financing to be tax deductible.   The biggest drawback may be if your equipment does become obsolete or fails, you could still be paying for equipment which is no longer a benefit to your business.

What are the key benefits of an equipment lease? A lease allows you to rent equipment, typically at a lower monthly payment than a loan, without having to put a down payment towards the equipment. This allows your business to keep more cash on hand for the working capital needs of your business. There are also tax incentives associated with a lease, and business owners may be able to claim the lease payment as a tax deduction. Possibly the greatest benefit of a lease is that it allows a business owner to stay current with technology. If you work in an industry where the equipment can become quickly outdated and/or will need to be replaced fast, a lease allows you to conveniently return the old equipment to lease the newest version. The biggest drawback of leasing is that it can be significantly more costly than purchasing the equipment outright, if you plan on holding onto that equipment long term.

When considering acquiring new equipment and how to specifically finance it, key important factors to consider include:

  • What potential revenue will new equipment generate for your business?
  • How quickly will that equipment become outdated?
  • What size of equipment will you need?
  • Who will be responsible for the maintenance of the equipment?
  • How will the overall costs affect the bottom line of your business?

Equipment financing can be obtained from a variety of lending sources, including banks, credit unions, alternative lenders, and companies that specialize in equipment financing. When you are ready to seek financing, whether a loan or a lease, make sure you:

  • Do your homework on the types and options available for the equipment your business needs. This can be an expensive investment; you want to make sure the equipment you are acquiring will generate more money than it will cost you.
  • Do your research on lenders to find the best fit for your business and to find a reputable company / lender.
  • Be prepared with your business plan, resume of experience in the industry, business financial statements and ensuring your credit is in order.
  • Read any contract thoroughly to be knowledgeable of the terms you are agreeing to. Always get a signed/executed copy once completed.
  • Be realistic about rates and terms based on your credit and the state of your business financials.

So what is the right fit for your business? If you are looking to purchase equipment that you do not need to update frequently and want to hold on to long-term, you may be better off acquiring the equipment outright via an equipment loan. If you are rapidly expanding or are in a field such as technology or the medical industry where you need to constantly update equipment, leasing may be a better fit. Each business is unique and every situation is different. It is up to you to weigh your options, do your research and make the choice that best suits your business needs.

Comments are closed

The Truth Behind Hard Money Loans

Maura Cannon : May 31, 2017 5:11 pm : Uncategorized

What comes to mind first when you hear the term “Hard Money?” Do you think of loan sharks, costly rates & fees, or troubled borrowers? Or do you see an opportunity to fix and flip a house quickly or purchase an investment property before someone else? There are a lot of different interpretations out there, so let’s uncover the truth behind hard money loans.

First, what is hard money? A hard money loan is a short-term loan secured by a borrower’s real estate and made by a private lender.   Unlike a traditional bank loan, private lenders look at the value of the real estate to determine whether to make the loan over a borrower’s credit worthiness. Private lenders who make this type of loan can be individuals, groups of investors and even licensed brokers.

While a hard money loan may be sought from some individuals with credit issues who are not able to secure a loan with a traditional lender, they are often times used by house flippers who want to acquire, fix and flip a property in just a few months; real estate developers who want to buy a lot, build a home and then turn around quick to sell it; and savvy investors who want to acquire a property and need to do it quickly but may not have the proper cash immediately at hand to do so, or simply want to make a short-term investment.

Hard money loans are often times misconceived as outrageously expensive, only for desperate borrowers and only being given by loan sharks with impossible terms to ensure they can just take over your property when you fail to meet the terms. So what are the hidden truths behind hard money loans? Here are some of the key points and benefits to know:

Primary Qualification – Private lenders use asset-based underwriting, meaning the primary consideration they are looking at when making a loan to you, the borrower, is the collateral. While they are not focusing on a borrower’s credit as the determining factor, they will want to make sure you have cash reserves on hand to be able to make your monthly loan payment should something unexpected happen with regard to your loan.

Quick & Convenient – Hard money loans can be closed relatively quickly, in just a few days or weeks, as opposed to a traditional bank which can take months to get to closing.

Cost – Hard money loans are not as expensive as one may think. While it is true the rates are higher with a shorter repayment period (typically six months to two years), the benefits often out weigh the costs. The loans are typically interest only with no pre-payment penalty, allowing borrowers to save money in the long run and free up their cash flow. This is often the most cost-effective option for those looking to acquire and sell a property quickly.

Flexible – Private lenders have the ability to negotiate terms to better meet your needs and evaluate each deal individually. Flexible structures can be used for a variety of purposes, whether that be adjusting repayment terms, fees or making a complex deal come together without jumping through the hoops of a traditional lender or dealing with the hassle of finding a lender who is willing to consider your high-risk deal.

Lender Credibility – Private lenders do not give out loans unless they deem it a smart and profitable investment. They are savvy business people who are looking to make a profit, therefor want to make it easier for you, the borrower, to pay them back. That being said, do your homework. While most private lenders are legitimate, predatory lenders looking to take advantage of a borrower do still exist.

Hard money loans often get a bad wrap. While they may not necessarily be the right fit for your specific lending circumstance, they are a respectable venture in the commercial lending industry.

 

 

Comments are closed

Underwriting mistakes in the commercial lending industry to be mindful of and make you a better informed loan applicant

Maura Cannon : May 11, 2017 5:13 pm : Uncategorized

What happens when the time comes for your business to seek a loan? How does the loan underwriting process work and how do you give yourself or your business the best chance of being approved? Who is the underwriter and what role do they play in this process? What should you expect from your lender to mitigate potential underwriting mistakes and look out for your best interests?

 

After you supply your lender or broker with the requested financial information for your request, the underwriter takes over and has the job of evaluating every aspect of your loan request from the quality of the collateral, income stream and the quality of you, the borrower to determine if the loan meets the lenders risk guidelines. While the criteria may vary from lender to lender, and each commercial loan application is unique, there are some common criteria that all lenders look for while underwriting your application. Those criteria include the capacity of the income from the business to adequately service the debt; the value and quality of the collateral; the overall creditworthiness of the borrower; the level of equity invested in the business; secondary sources of repayment; any additional collateral or personal guarantors; and the story of your business to put the financial analysis into perspective.

While the underwriting process and amount of information sought from you, the borrower, may seem excessive and tedious, it is critical to cooperate and give the full picture to the underwriter to give yourself the best chance of getting your loan approved. On the flip side, the underwriter and the lending institution need to ensure they complete a thorough analysis while avoiding common underwriting mistakes that occur in the commercial lending industry. What might those mistakes be? Some of the most common mistakes that lenders can make in the underwriting process can include the following:

Communication issues – Far too often lenders fail to ask customers for enough details or don’t listen to specifics with regard to customer needs and place them in a loan type that just is not the right fit. It is also important that the lender manage the borrower’s expectations when it comes to potential rate, timing of the transaction and money needed to close the loan. Lenders should not hesitate to go back to the borrower with more questions, to validate the accuracy of data or get explanations for any inconsistencies.

Failing to get proper training for lenders – It is important for lenders to understand proper underwriting guidelines, recognize bankruptcy risk and other red flags, along with be able to structure a loan the right way to ensure not only that a loan request is processed efficiently, but also to avoid structures that are upside down, negatively affecting cash flow and repayment capacity.

Basic underwriting pitfalls – Strong underwriting involves understanding the risk components of credit, capacity, and collateral, otherwise known as the three C’s of underwriting. Basic controls need to be established by the lending institution to ensure a thorough review of the loan application and borrower documentation so all requirements and conditions are met; validating and revalidating data to avoid incorrect calculations, insufficient asset verification or occupancy misrepresentation; and proper oversight and checks and balances with the underwriting process and decisions.

In summary, as a borrower, you want to make sure your lender is looking out for your best interest and that you have provided all the relevant facts and documentation requested in a timely manner.   It is crucial for them to be able to accurately and thoroughly underwrite your request, along with understand the purpose of the loan and the story of your business, so that they can effectively communicate your story and deliver the desired outcome.

Comments are closed

State of Lending November 2014

admin : November 21, 2014 2:36 pm : Uncategorized

Although there are plenty of economic indicators out there, following what is happening in the lending markets is another good one that is often overlooked. To give our clients a better idea of what is going on in the lending markets, below is a brief summary of what we have witnessed over roughly the last two years.

lending

At the start of 2013 lenders came out of the gates looking to put new loans on their books, and there was a flurry of activity. However, by mid-2013 that flurry had slowed. Although it is not 100% clear what caused the shift in lenders’ mindsets, it appears concerns over the economy, the government shutdown, lenders hitting goals earlier in the year, as well as a continuing tightening of credit standards are largely to blame for the slow down in lending in the second half of 2013. Many anticipated the start of 2014 would be similar to that of 2013, with a flurry of activity from Bank’s to put new loans on the books. And although most Banks were aggressively out there marketing and claiming to be open for and looking for new business, in 2014 it has been a struggle for most businesses to borrow money. That struggle has mainly been based on a continued tightening of credit standards even further in 2014. Although there are exceptions to that rule, in general most Banks are more stringent today on whom they will lend money to then they were even a year ago.

So why are credit standards even tighter today? It is primarily due to an overall shift in how Banks handle lending. In the past managers and lenders on the origination / sales side often played a roll in the approval process. However, due to pressure from regulators and continued management concerns over a separation of church and state (or in this case lenders and underwriting), the underwriting departments for most Banks have become more centralized and autonomous, operating separately from the sales team. Lenders on the street now have very little to do with the approval process, and in many cases even their managers no longer have a say in what gets approved. In most cases the approval process is now controlled by central underwriters and credit managers who have nothing to do with the sales process and often times are compensated not on portfolio growth but on portfolio performance, incentivizing them to not take on risk. This has left the sales teams at many Banks, who now once again have growth goals, to be on the street actively marketing and looking for deals, but in a position where much of what they bring in gets denied if the credit request is not 100% pristine.

Build bank

The good news is there are plenty of Community Banks that have gotten healthy again and are sitting on plenty of cash to lend. Community Banks are aggressive, and often times willing to take on some of the risks associated with deals that the bigger banks are not taking on, partly because the credit team is not as separated and partly because they see higher rates of returns in deals with a bit more risk. There are also plenty of lenders with larger Banks that are getting a handle on the types of deals they can get through their credit departments, allowing for quicker and better feedback. Overall there are still plenty of opportunities to get financing done. But the day of walking into multiple banks and getting multiple approvals is long gone. Now it is much more likely for an individual to walk into multiple banks and get multiple denials, and it is considered lucky to walk into multiple banks and get one approval, making the lending process frustrating for most commercial loan borrowers. It is now that much more important for a commercial loan borrower to not only get to the right institution, but also to the right individual lender within that institution that understands enough about credit that they know how to navigate their Bank’s credit process.

National_Bank_Oamaru

All of this difficulty in getting financing comes back to the economy. Companies struggling to get the financing they need to grow are limited in the amount of growth they can achieve, and hence the profits and jobs they create. Also, there appears to be a sense that part of the reason credit departments and bank managers are still conservative in whom they will lend to is because they are still not confident the economy has fully recovered. After five years of consistent, albeit slow, economic growth, many credit managers are afraid another recession might be around the corner. What they fail to realize is that it could be their own tight lending standards that hurt small business and help to make another recession a reality.

Comments are closed
« Page 1, 2, 3 ... 6, »