For small business owners who own or wish to own a building for their business, SBA loans can offer an attractive alternative should conventional real estate financing not be available from a bank.
What Are SBA Loans, and How Do They Work? One of the most important things to understand about SBA loans is that they are nothing unusual.
They are regular commercial loans made by bank and non-bank lenders using their own credit guidelines as though SBA did not exist.
Where SBA does enter the picture is that the SBA guarantees business loans after a lender has already approved it and only if the lender requests the SBA guarantee.
Prior to that, the SBA never sees it.
The only substantive difference is that SBA has certain guidelines that have to be met, and as long as the lender works within those guidelines, the loan can be guaranteed.
There are also prepayment penalties, but on a declining scale and only for the first three years of the loan.
SBA loans can only be used by business owners for their own businesses.
They cannot be used for investment properties.
SBA loans are designed to provide longer-term financing for business owners than is customarily provided by commercial banks.
For real estate, SBA allows up to a 25-year amortization, and loans cannot be called.
Very seldom do banks issue commercial real estate loans with such long amortizations, and if they do there is usually a call provision.
After a certain period of time, specified in the original loan documents, a bank is allowed to "call" the loan, forcing the borrower either to pay it off or refinance.
This could pose some real problems for the business owner for any number of reasons.
Cash Is King You have probably heard the old saying that "cash is king.
" In our context, that is, to a mortgage lender, it means the amount of cash generated from a business that can be used to pay a mortgage.
Many people mistakenly think that net income is cash flow, but it is not.
Net income does not tell you how much cash is generated by the business.
Generally there are three items, sometimes four, on business tax returns that a lender uses determine the cash flow available to pay the mortgage.
They are net income, interest and depreciation.
If a business owner is currently renting their space the rent can also be added since it will now be going toward a mortgage instead of rent.
The cash generated by a business is the only number that can be used to determine how much mortgage a business will support.
Lenders want a certain amount of cushion when looking at how much cash there is available for loan payments, on the assumption that if there is a temporary slowdown in business, the cash flow will not be so tight as to not have any cushion to still make the loan payments.
Usually this is expressed by the term debt coverage ratio.
That means that if, for example, the mortgage payment is $1, a lender may want to see $1.
25 in cash flow available to make the $1 payment.
This is not an automatic rule.
Different types of lenders may have slightly different requirements and often the higher the risk perceived by the lender, the higher the required debt coverage ratio.
Cash is king.
This does not mean that other things are not important, such as revenue and income trends, collateral value, borrower's credit history, etc.
But if there is not sufficient cash flow to support a mortgage, the rest usually doesn't matter.
What Are SBA Loans, and How Do They Work? One of the most important things to understand about SBA loans is that they are nothing unusual.
They are regular commercial loans made by bank and non-bank lenders using their own credit guidelines as though SBA did not exist.
Where SBA does enter the picture is that the SBA guarantees business loans after a lender has already approved it and only if the lender requests the SBA guarantee.
Prior to that, the SBA never sees it.
The only substantive difference is that SBA has certain guidelines that have to be met, and as long as the lender works within those guidelines, the loan can be guaranteed.
There are also prepayment penalties, but on a declining scale and only for the first three years of the loan.
SBA loans can only be used by business owners for their own businesses.
They cannot be used for investment properties.
SBA loans are designed to provide longer-term financing for business owners than is customarily provided by commercial banks.
For real estate, SBA allows up to a 25-year amortization, and loans cannot be called.
Very seldom do banks issue commercial real estate loans with such long amortizations, and if they do there is usually a call provision.
After a certain period of time, specified in the original loan documents, a bank is allowed to "call" the loan, forcing the borrower either to pay it off or refinance.
This could pose some real problems for the business owner for any number of reasons.
Cash Is King You have probably heard the old saying that "cash is king.
" In our context, that is, to a mortgage lender, it means the amount of cash generated from a business that can be used to pay a mortgage.
Many people mistakenly think that net income is cash flow, but it is not.
Net income does not tell you how much cash is generated by the business.
Generally there are three items, sometimes four, on business tax returns that a lender uses determine the cash flow available to pay the mortgage.
They are net income, interest and depreciation.
If a business owner is currently renting their space the rent can also be added since it will now be going toward a mortgage instead of rent.
The cash generated by a business is the only number that can be used to determine how much mortgage a business will support.
Lenders want a certain amount of cushion when looking at how much cash there is available for loan payments, on the assumption that if there is a temporary slowdown in business, the cash flow will not be so tight as to not have any cushion to still make the loan payments.
Usually this is expressed by the term debt coverage ratio.
That means that if, for example, the mortgage payment is $1, a lender may want to see $1.
25 in cash flow available to make the $1 payment.
This is not an automatic rule.
Different types of lenders may have slightly different requirements and often the higher the risk perceived by the lender, the higher the required debt coverage ratio.
Cash is king.
This does not mean that other things are not important, such as revenue and income trends, collateral value, borrower's credit history, etc.
But if there is not sufficient cash flow to support a mortgage, the rest usually doesn't matter.