Maximizing the Availability of SBA Dollars

You already know SBA loans are available to most for-profit businesses for a wide array of purposes, from starting and growing a business to purchasing commercial real estate.  You might even know the 7(a) Loan Program and the 504 Loan Program like the back of your hand.  However, are you utilizing these programs in a way that maximizes the availability of SBA dollars for future growth?

 

A 504 and 7a Comparison

 

	SBA 504 LOAN	SBA 7a LOAN
ELIGIBLE USES	Buy, build or renovate owner-occupied commercial real estate Purchase equipment with a useful life of 10 or more years Refinance existing debt with or without a new project	Start, expand or acquire a business Working capital or inventory Purchase equipment Buy, build or renovate owner-occupied commercial real estate Refinance existing debt
LOAN AMOUNT	$5 million in most cases $5.5 million for manufacturing or “green” projects	$3.75 million net – guaranteed portion only $5 million gross

 

 

What’s the secret to maximizing the availability of SBA dollars?

The secret is this:  use the 504 Loan Program for what it was intended, thereby maximizing the availability of SBA dollars overall.  Many lenders are familiar with the better-known 7(a) and automatically use the program when financing any type of small-business concern.  In reality, when the 7(a) is used for real estate and/or equipment financing, it occupies more SBA-available dollars than 504. This may prevent the lender from being able to fund future working capital, inventory, and other business needs as they arise.  The SBA guarantee is important for working capital and inventory because there is little/no collateral value and these are items that cannot be financed with the 504 Loan Program.

Let’s look at an example of how this might play out.  A borrower is looking at borrowing $5 million to purchase commercial real estate.  The choice between which SBA financing program to use in financing this project could potentially impact future growth.  Here’s why:  let’s say a year later this same borrower needs about $750,000 in financing for working capital, inventory and additional equipment.  If a 7a was used for the real estate purchase last year… you’re out of luck!  There are virtually no SBA 7a dollars remaining to support your loan because they were used up in the real estate project.  However, had you used 504 for that original real estate project, there would still be $1.75 million in 7a dollars or $3 million in 504 dollars still available to the business (that’s because the 504 is only 40% of a project).

 

SBA Dollars Used for a $5 million commercial real estate purchase:

LOAN PROGRAM	DOLLARS USED	DOLLARS LEFT AVAILABLE FOR FUTURE BORROWING
SBA 504	$2 million SBA Dollars (40% of the real estate purchase)	$1.75 million in 7a guarantee -or- $3 million in 504
SBA 7a	$3.75 million SBA Dollars (75% guarantee of $5 million loan)	$0 in 7a -or- $1.25 million in 504

After businesses expand into a new commercial property, they may need additional financing for working capital, inventory purchases or to acquire other businesses (not 504 eligible).  If the 504 was used for the real estate purchase, there are still plenty of 7(a) dollars left available.

 

 

Maximizing the benefits of rates and fees

There’s more.  Keep the $5 million real estate purchase example in mind as we look at one-time fees and rates:

FEES:

LOAN PROGRAM	APPROXIMATE ONE-TIME FEES	SBA PAPERWORK FOR LENDER	ONGOING REPORTING BY LENDER TO SBA?	MONTHLY FEES LENDER PAYS TO SBA?
SBA 504	$68,224 + closing costs (title work, filing/recording fees, etc.)	No	No	No
SBA 7a	$138,125 + closing costs (title work, filing/recording fees, etc.)	Yes	Yes	Yes

 

 

RATES:

LOAN PROGRAM	RATE STRUCTURE
SBA 504	Bank can charge up to SBA max rate:  Prime + 6% on its 50%
SBA 7a	Prime + 2.75% max rate Can be fixed or variable Bank receives a smaller spread, which is further reduced because the bank has to pay 0.5% of that monthly to SBA

 

504 and 7a Quick Takeaway

If you’re financing owner-occupied commercial real estate or heavy equipment, think 504.  If the financing is to purchase a business, inventory or for working capital, think 7a.  If using a combination of 7a and 504 loans simultaneously, the order in which the loans are approved determines the maximum loan and guaranty amount available.  Because the 7a loan has a lower maximum guaranteed amount, the 7a loan should be processed and approved first.

 

If you run a small to medium sized business in and need financing to enhance your existing business or construct/purchase a new building, Growth Corp’s team of professionals will work with you directly to provide the best financing strategy for reaching your goal.  Contact any member of our Lending Team today!