SBA Financing

There are some major advantages to SBA-guaranteed loans:

• Longer amortization schedule. Loan terms are up to 25 years for real estate and up to 10 years for working capital and equipment. Simply put, a longer term means lower payments. Lower payments allow you to retain and utilize more working capital, which is essential for a growing business. You can pay the loan faster if you wish. Conventional loans often have shorter repayment periods, which can make cash flow difficult. Many SBA loans are originated to refinance debt on a longer repayment term, thus improving a company’s cash flow.
• No early balloon payment. (No early maturity.) This eliminates loan renewal costs, real estate appraisals, and lender points in future years. Since SBA guaranteed loans are “fully-amortizing” (do not have early balloon payments) you won’t face the stress and time-consuming chore of renewing your loan in a few years as you would need to do with a conventional loan.
• No minimum or maximum financial ratios. Usually there will not be a minimum required Debt Service Coverage Ratio and no maximum Debt-to-Worth. The absence of financial covenants allows you greater flexibility in managing your balance sheet and cash flow.
• No “Payable Upon Demand” clause. Unlike SBA loans, most conventional loans have these “demand” clauses. A demand clause allows the lender to require immediate full payment (loan payoff) in the event that your company does not report satisfactory financial results or if the lender changes its loan standards. A SBA loan does not have any demand clause.
• Limited or no prepayment penalty. SBA loans have only a three year prepayment penalty for loans with maturities of terms fifteen years or more. These prepayment penalties only apply if you prepay more than 25% of the loan in any one year or if you pay off the entire loan early. The prepayment penalty is calculated on the amount that is in excess of 25% of the balance, and is 5% in the first year, 3% in the second year, and 1% in the third year. So, you could pay the loan off in as little as four years with no prepayment penalty.
• More flexible collateral conditions. The SBA focuses mainly on business cash flow and overall creditworthiness. The SBA will attempt to work with companies that do not possess collateral that is within traditional bank lending parameters. In real estate transactions, an SBA loan may offer an equity requirement that is substantially more favorable than conventional financing. This can greatly lower your overall cash out-of-pocket and increase the rate of return on your investment. In the case of construction financing, conventional loans often do not finance the loan soft costs, where an SBA loan includes the loan soft costs within the loan.
• One-time close. If the loan is for building or renovating an existing property, you close the loan once before construction, then without a second closing begin the amortization schedule (repayment) after construction is completed. You have to sign only one set of documents, work with only one lender, and attend only one loan closing. In addition to the convenience of a single closing, this also saves you money on closing costs.
• Compliance with bank lending limits. All banks have a limit to the amount of money that they can lend to any one borrower. Since the bank is only partially at risk in funding an SBA loan, SBA financing allows you to preserve your total loan availability at Empire State Bank. This is very beneficial if you are in a line of business in addition to your primary business (residential development, commercial real estate, etc.) that requires you to borrow for that business.