As a national small business lender with a focus on originating Small Business Administration (SBA) loans, I am constantly astonished by the general misunderstanding of the benefits these loans offer to professionals. SBA loans have a reputation as loans of last resort, which are expensive to procure, slow to close and a hassle of paperwork and forms. In fact, when properly managed, SBA loans provide a unique opportunity for independent professional firms to secure long-term asset appreciation with a very attractive and stable structure. Today’s depressed real estate values and historically low interest rates make this a great time for insurance professionals to consider purchasing, instead of leasing, the real estate that houses their business. Let’s dig deeper into the opportunity and dispel some of the myths surrounding SBA loans.
There has never been a better time to buy real estate. Office condominiums and smaller office buildings are ideally suited to insurance professionals. In many markets, agents can purchase an office condo and pay the same or less for their mortgage and taxes as they are currently paying for rent. Additional benefits include the stability of ownership, long-term gains from appreciation and freedom to design the space from scratch. Lenders will include funds to build out the space, and even roll equipment costs and working capital into the loan. And, when it’s time to sell the practice, you will have the option to retain the building, and enjoy a revenue stream from renting the space to the new agency owner.
Let’s look at a case study. We recently provided a loan to an independent insurance agency that illustrates the power of SBA financing. This agent was renting a little over 1,000 square feet of space in an older building with no street frontage. He procured a $600,000 loan that allowed him to acquire a building of his own. The new property has three levels and a total of 4,100 square feet. The bottom two levels have 2,200 square feet of usable office space for the business, which the borrower will use for future expansion. The third level has a 1,900 square foot, three-bedroom apartment, which will eventually be leased for roughly $2,000 per month. The space is in new condition and completed with high-end finishes and great street exposure. It is a little over three miles from the advisor’s current shop, but actually more central to his overall client base. Incredibly, his total monthly cost of occupancy will actually be reduced by $500. And, when he retires, he will have accumulated significant equity value. His total equity injection for this transaction was just 5 percent of the loan amount, or $30,000. It took this borrower under 40 days from loan approval to closing. Does this sound like a loan of last resort to you?
Had this borrower obtained a conventional commercial loan to acquire his office building, he would have been required to put more cash into the transaction, (probably 30 percent or $180,000), and he would have gotten a much shorter loan term of 10 years, instead of the 25-year term he enjoyed with the SBA product. This would have more than doubled his monthly payments, and reduced the security of having a long-term permanent loan in place for his business.
So what gives? Why does SBA lending elicit such negative reaction if it offers so much to borrowers? Unfortunately, there is a lot of bad information about SBA lending. Here are some popular misconceptions about SBA loans and how to avoid lending pitfalls:
1. It’s hard to qualify for an SBA loan, and even if I do, they take forever, and the paperwork is overwhelming.
The SBA program does have eligibility requirements, but for the vast majority of borrowers they are not an issue, and experienced lenders are adept at structuring loans so they fit the SBA’s guidelines. Unfortunately, many small banks make only a handful of SBA loans every year, and because of this, do not fully understand the program. This leads to delays and confusion over just how to process the loan.
A knowledgeable lender has a dedicated SBA staff, and has delegated authority from the SBA to both underwrite and close loans. If you choose the right lender, an SBA loan will take 30 to 45 days to close. Be sure to ask how many loans the bank has done, and ensure that the lender is a member of SBA’s Preferred Lender Program, or PLP. And remember, the SBA doesn’t actually make the loan. The SBA guaranties a portion of the loan made by the bank as an inducement for banks to lend to small businesses. Your loan is coming from the bank, and will be approved by the bank. You should be provided with a clear commitment and time frame for closing in order to avoid confusion and delay.
2. SBA loans require a minimum of 10 percent equity injection on the part of the borrower.
There is no “minimum equity injection rule” mandated by the SBA. Injection and leverage are determined by the lender based on the credit of the borrower and other determining factors. As we saw from the example above, SBA loans can be made with little or no cash injection if warranted by the overall creditworthiness of the application.
3. I already have a conventional bank loan on my building, and SBA loans can’t be used to refinance conventional debt
This is incorrect. SBA loans are a very good vehicle for refinancing conventional debt. If you obtained a loan to purchase a building several years ago you should consider refinancing it at a lower interest rate with a longer term. Amortizing the loan over more years will lower your monthly payments and directly improve your cash flow. In many instances, very little, or even no cash at all is required form the borrower to refinance existing debt. For a number of our clients, this simple move has resulted in monthly savings of thousands of dollars.
The best way to kick start your diligence into building ownership is to contact a real estate professional. Real estate brokers typically know banks that can finance your transaction, and they have a vested interest in getting the deal done, since they don’t get paid if you don’t get the building. Don’t be afraid to get out and look at property, talk to your peers in your market to find out what they have done, and make sure your bank understands the details of making an SBA loan. And, have all your financial information in order so you present yourself in the best light. It’s worth the effort.