How To Market Yourself As A Real Estate Expert: Understanding SBA Loans

SBA = Small Business Administration



SBA stands for Small Business Administration, which is a government subsidized program. We could spend an entire week talking about SBA loans, but here are the basics and the things you need to know to get started:



SBA loans are not funded by the government, but they provide a government guarantee to the lender in the event that the loan defaults. This means borrowers who would typically not qualify for a standard commercial bank loan can get a loan. With a partial government guarantee, a bank will take on the risk of a new business or even a start-up business. Without the government guarantee, the bank would definitely decline these types of loans.



There are a handful of SBA loan programs, but there are really only 2 that you would probably ever use; these two programs are the 7a Program and the 504 Program.



The 7a Loan Program



The 7a Loan Program offers a guarantee of between 50% and 75% to the lender, and is typically used for Machinery & Equipment Loans (M&E Loans), Accounts Receivable Loans (A/R Loans), or Unsecured Loans. The 504 Program is used for real property. I’ve seen several borrowers who think the bank should offer them the world because the borrower believes since it is an SBA loan, the bank has no risk. This isn’t true. If the loan defaulted, the SBA would require the bank to liquidate all collateral and pay down the loan amount.



After paying down as much of the loan as possible, the SBA would then pay off between 50% and 75% of the remaining amount, and the bank would be required to write off the rest. So there is still risk involved. Even though there is a government guarantee for a portion of the loan, an SBA loan has to go through a more rigorous approval process than a typical commercial loan because the risk is generally higher. Whether the guarantee is 50% or 75% typically depends on the collateral. An unsecured loan would only be guaranteed by 50%, and a loan secured with machinery or some other worthy collateral would be more likely to have a 75% guarantee.



The 504 Loan Program



The 504 Loan Program is for commercial real properties. These loans are usually done in conjunction with a Certified Development Company, usually called the CDC. The CDC is a nonprofit corporation set up in different communities to contribute to the economic development of its community. A CDC works with the SBA and various lenders to get loans done. There are about 270 CDC’s nationwide.

A 504 loan will be underwritten by both the bank and the CDC. The bank would be in a first lien position with about 50% of the loan. The CDC would then take between 30% and 40% of the loan in a second lien position. The borrower would then have to put down between 10% and 20%.



Now, you may be thinking, "Great; an opportunity to get a commercial loan with only 10% down!" It isn’t that easy. First of all, the SBA only offers loans for owner-occupied businesses. This means the borrower is also the business operating in the building that is being funded. The SBA will also not refinance a current SBA loan. There is a limited pool of money set aside for the SBA, and if someone currently has an SBA loan, they probably have a more viable business than someone who is just starting out. So, the SBA has opted to use the funds for the businesses that are just starting out.

The borrower with the current SBA loan would have to get conventional financing. There are several other SBA requirements, and the key to making sure you get a loan that fits is to find a lender that is an expert in SBA loans. If you use a lender who doesn’t do very many SBA loans, it can make the process a nightmare.



Some borrowers think they will automatically qualify because they are getting an SBA loan. This isn’t true. Banks actually have to approve the SBA loan, not the SBA. The credit process isn’t easier than any other loan. Sure, the SBA does have to approve the loan after the bank does, but the SBA approval is not based on a credit decision. They just have to make sure that it meets the SBA guidelines.

Prepare for Paperwork



Like most government programs, the SBA loan program is no different. There is, unfortunately, a lot more paperwork involved in an SBA loan than in another typical commercial loan. Many commercial brokers won’t do SBA loans because of the huge amounts of paperwork. However, for the right loan, an SBA loan is exactly what a broker should use.

Another interesting item about the SBA is the type of properties they have that come up for auction. The US government seizes properties for all types of reasons; IRS issues, defaulting on SBA loans…etc.