SBA 7(a) loan program boosts bank financing of commercial mortgages
The basics of the Small Business Administration 7(a) loan program
- Maximum loan amount: $5 million
- Proceeds can fund a variety of business purposes, including buying, renovating and building commercial real estate
- Loans are made through SBA-approved lenders, and a portion of each loan is guaranteed by the agency
- Loans are long-term with relatively low interest rates
- Application process requires extensive financial documentation
The federal government, through the U.S. Small Business Administration (SBA), is a significant player in commercial real estate financing. The agency's most popular commercial financing vehicle, known as the 7(a) loan program, funds the purchase, renovation and construction of commercial real estate — among many other small-business ventures.
The SBA runs the 7(a) program, but it doesn't lend money directly. SBA-authorized lenders make the loans — used to fund small-business operations and purchase commercial real estate — and the agency guarantees a large portion of the loan amounts. The guarantees significantly reduce the lenders' risk, making loans available to small businesses that would otherwise be shut out of the market for affordable credit.
Loan eligibility and uses
There are some exceptions that the agency lists on its website, but the 7(a) program is generally available to for-profit small businesses that operate in the U.S. and whose owners have personally invested equity in the company. What's a small business? The SBA defines that as any manufacturing company with fewer than 500 employees and nonmanufacturing businesses with less than $7.5 million in annual revenues. A number of franchise and industry-specific definitions are outlined by the SBA as well.
The uses allowed for the loan proceeds are fairly broad, including buying or renovating real estate, construction financing, refinancing business debt and providing long-term working capital to pay for operations and inventory. The money can't be used to fund a partial change in business ownership, to retire back taxes or to fund unsound business practices, as defined by the SBA.
Businesses can borrow up to $5 million under the 7(a) program, and there is no set minimum loan. Banks' lending risk is reduced under the 7(a) program, but it's not eliminated entirely. The SBA guarantees a maximum of 85 percent of loans up to $150,000, and 75 percent on loans higher than $150,000. The most the agency will guarantee on any single loan is $3.75 million.
The 7(a) program is designed to promote long-term financing that would be out of reach to many small businesses without the SBA guarantees. The maximum loan maturity is 25 years for commercial real estate, and less for other uses. The program allows an interest-only structure during the first years of a loan, while businesses gain financial footing, but it bars balloon payments and most prepayment fees that are common among hard money lenders.
As a borrower, you negotiate with your bank to set the interest rate, fees and determine whether the rate is fixed or variable, just as you would with any commercial mortgage loan. But, the SBA sets some limits. On loans of less than seven years, lenders can charge the prime interest rate plus 2.25 percent. On loans longer than seven years, the maximum is the prime rate plus 2.75 percent. Maximum rates are higher for loans of $50,000 or less.
The minimum down payment for a 7(a) loan is 10 percent, although banks may require a higher amount.
When you're applying for a 7(a) loan, be prepared to submit extensive documentation that the lender will need when it forwards your loan package to the SBA. You can start with going online to download the program's standard application form. You'll also need personal and business financial statements, profit-and-loss statements related to the property, a projected profit-and-loss statement, income-tax returns and resumes from all of the business partners or owners applying for the loan. The full list of required paperwork can be obtained from the SBA.
The process of gathering and presenting that information, and awaiting action from the bank and the SBA, can take months to complete. A program called SBA Express guarantees a response from the agency within 36 hours of when it receives application material. That program encompasses only loans of $350,000 or less, allows banks to charge higher interest rates and limits the SBA guarantee to 50 percent of the loan amount.