SBA Guidelines for Residential Assisted Living Businesses
If you are in the market to buy, start or invest in a residential assisted living business then an SBA loan will most likely provide the highest leverage and the greatest flexibility.
SBA loans for assisted living – specifically the SBA 7a loan – allow you to finance a residential assisted living business or an assisted living business and the home. In other words, the loan can be used to finance businesses and/or property.
Purchase, Startup, Construction or Expansion
You can finance a residential care home with little or no money out of pocket depending on whether you are financing your first home or you have many. Care home mortgages are readily available for the following:
purchase of an existing residential assisted living business
buying a residential care home business and the real estate/property/home
ground up construction or conversion of a home
refinance of an existing residential assisted living business or home
Residential Assisted Living Business – No Down Payment
Financing for residential assisted living facilities is possible with no down paymentif you already own at least 1 successful residential assisted living facility for long enough to prove to a lender that you are a good operator. Usually, this means at least 1 year, but it is a lender decision dependent on your qualifications and the strength and stability of the cash flow.
Frequently, lenders will want to see at least one business tax return covering a full year under your ownership/management and showing enough profit.
RCFE Purchase With Seller-Held Debt for Down Payment
Additionally, if you are purchasing an RCFE or similar SBA-eligiible business, and the seller is willing to hold 10% on full standby for 24 months, and you have enough cash reserves to satisfy a lender, good credit, the right managment, etc. then you do not need a down payment.
100% Construction Financing
The 7a program allows you to purchase just the business or the business and the home and experienced owners can even secure 100% ground up construction financing or get a loan for a purchase and renovation. The key being able to get it done without a down payment is having a long enough and successful enough track record owning and operating other homes.
If purchasing just the business then a 10 year loan is available. If purchasing the business and the home and the home is more than 50% of the purchase price then a 25 year loan is available with the right lenders. You can visit the 7a page of our website for a full rundown on most SBA 7a rules here: SBA 7a loan requirements.
Refinancing an SBA Care Home Mortgage
June 2024: Important Update
It is no secret that SBA loans are one of the few ways to get a residentially zoned property approved to operate a care home, assisted living facility or adult foster home, and many borrowers have figured this out over the last 5+ years. However, many borrowers have a floating rate SBA 7a loan and most of those loans adjust with the Prime Rate…and Prime has been going up dramatically lately as have the interest rates for all loans.
Historically, there hasn’t been a good way to refinance these loans due to the fact that they are residential property with a commercial business operating out of them, but last year the SBA changed the guidelines to allow business owners to use the SBA 504 program to refinance an SBA 7a loan.
This is a fairly dramatic change to the SBA rules and gives those with SBA 7a care home mortgages who have seen their rate rise along with the Prime Rate an option to get into a long term fixed rate.
You can get a full rundown on the latest refinance rules here: SBA 504 Refinance
Keep in mind that the 504 program can only be used to refinance real estate, furniture, fixtures and equipment, so if your 7a loan was used to finance a lot of goodwill then the 504 might not be a good fit, however you can now also use a 7a loan to refinance a 7a loan…
Most SBA residential assisted living business loans are SBA 7a loans that have a floating (adjustable) rate tied to the WSJ Prime Rate and the rate is usually a margin above the Prime Rate – usually something like Prime plus 1.5% or more.
Typically, a borrower “settles” for this type of loan after speaking to many lenders and realizing their options to get an attractive rate are limited. This is usually due to the fact that they don’t have enough experience in the industry or with the particular business/facility.
Well, contrary to what you might find online or be told by some SBA lenders, there are 7a lenders with very good rates for the borrowers with the right amount of experience, great cash flow, etc. and these lenders will frequently offer rates that are NOT tied to the Prime Rate (in other words, below the Prime Rate) or at something as low as Prime + .50, Prime +1 or even Prime + 0%.
These kinds of rates are available for seasoned operators and typically if you are saving 2% or more in rate, it is worth it to refinance.
Financing A New Care Home Business
The startup of a new care home business for someone who does not currently own one usually requires 10% down, but there is a lot of flexibility with where the down payment can come from. (See further down the post for acceptable sources of down payment).
An SBA care home mortgage for a residential assisted living business is available for new businesses that can show the following:
clear and concise business plan
solid projections as well as good “assumptions” for the projections
good personal credit
enough relevant experience/proper management
enough net worth/reserves
outside income
Obviously, there is a lot more risk with a new business, so the more compelling a case you can make to a lender, the greater your odds of approval.
The good news is that the guaranty that lenders get with the SBA 7a is more or less a mortgage insurance policy that covers 75% of the loan amount, which removes a lot of risk for a lender and makes it easier for them to approve a loan to start/invest in a new residential assisted living business.
Care Home Mortgage Down Payment Options
Commercial mortgages for care homes through an SBA lender allow for a lot of flexibility with regard to the source of down payment and there are numerous ways you can come up with the 5% to 10% required for a business acquisition.
The down payment can come from the following sources when purchasing either the business or the business and the home/building:
Cash/Liquid Assets
Loans – as long as you have another source of stable income from another business, another job or a spouse with income, you are allowed to borrow all or part of the down payment per SBA rule. There are many potential sources of funds for a down payment loan, but most often we see borrowers tapping home equity in a primary residence or an investment property to do this, especially in areas where property values have increased dramatically, like California.
401k from a former employer (this can also be done tax and penalty free)
Loans against a 401k
Gift
Investors – the SBA allows you have “investors” who invest their cash in the business in exchange for a small ownership percentage in the business. You just need to keep an investor under 20% ownership otherwise they would also have to guarantee the loan.
Seller held 2nd on “full standby”- (this is where the 5% referenced above comes into play) – a seller is allowed to hold up to half of the down payment required by the SBA for a board and care home loan for either the business or property (or both) AND have it count as additional equity or down payment as long as it is on “full standby,” which means that you are not supposed to make payments to the seller on that loan until you have paid off or refinanced the SBA loan.
Residential Assisted Living Business Financing Qualifications
There are many factors involved in undewriting a residential assisted living business, but at a minimum you need to have the following:
Good credit and good credit scores*
Experience in the industry or relevant experience that a lender can get comfortable with
The property/business you are looking to acquire needs to have good occupancy and cash flow
Financing for Larger Facilities
We see a lot of transactions where single family homes have been converted into a residential assisted living business for 6 to 8 residents, but it is possible to finance larger facilities as well as other types of properties as well. Unusual situations can also be funded as long as the loan request make good sense.
As an example, one of our lenders recently funded a project with multiple homes and a common dining hall on one property.
Residential vs. Commercial – Which is it?
The issue many lenders face when evaluating a board and care home mortgage request is that residential care facilities are technically both residential and commercial in nature – they are usually single family homes in neighborhoods, but they require licensing for the facility and the operators and thus are not eligible for conventional residential financing. This unusual hybrid of a commercial business in a single family home (and in a single family neighborhood) typically creates confusion on the part of local bankers as to what type of financing they can offer.
SBA 504 vs 7a
The 2 primary types of care home mortgages are the SBA 504 and the SBA 7a.
In the case of assisted living/senior care, the SBA 504 can only be used to purchase real estate and FF&E, meaning you cannot use it to purchase a business. As mentioned above, the 7a can be used for the business and/or the building and as a result the 7a is the more versatile program. The 504 is worth looking at if you are paying cash for the business, the seller is financing the business or if you need to refinance a residenital care home you already own.
In order to get a full 25 year amortization with the 7a, the real estate needs to be the larger percentage of the financed amount, otherwise lenders will shorten the term of the loan to somewhere between 10 and 25 years.
One downside to the 7a is that it can sometimes be a floating rate, but it has a very reasonable and short prepayment penalty, so it is a great option that enables you to purchase the business and building with the idea of refinancing after 2 or 3 years should that be necessary.
The obvious downside to the 504 is that you cannot use it to purchase a business, but it does offer excellent terms if you already own the business and want to purchase the real estate. It may also be possible to get 2 SBA loans for a residential care home: a 504 for the real estate and a 7a for the business.
Healthcare or Medical Services Requirement
Per SBA rule, all residential care facilties must provide “healthcare or medical” services.
This rule came about in April of 2019 and the SBA has not given much guidance on it since, so it is still a bit of a gray area and it is up to lenders to decide what they consider “healthcare or medical services.” One would have to assume that any facility that is not providing some level of care beyond just room and board will not be eligible. The fact that the rule is vague leaves room for interpretation from lenders and thus far, providing services such as dispensing meds or providing transportation to doctor’s visits might be enough.
Update June 11, 2022:
The SBA has updated this guideline.
Per SBA, assistance with “Activities of Daily Living” (ADLs) meets the requirement of “providing healthcare and/or medical services.” Again, this still allows for a lot of interpretation on the part of lenders, which is a good thing.
SBA Adult Care Home Licensing Requirements
The SBA has also stated that there is NOT a requirement that licensed nurses be on staff unless that is a condition of the state where the business and property are located to grant a license to the facility. Also, proper licensing is sometimes a “prior to loan closing” or funds disbursement condition, although there are many states where it is not possible to get the license until you own the home. However, there are reasonable lenders who will give you time to secure the license post-closing.
Residential Assisted Living Business Construction Financing – SBA Loans for Construction or Renovation
SBA loans are available for construction (including ground up), conversions or renovation of both commercial and residential assisted living facilities as long as you have the right qualifications to get a lender comfortable with the additional risk of a construction loan.
In fact, 100% construction loans are available for experienced owners who are building a new location as long as you have a long enough and profitable enough history with your current location(s) and your business plan and projections make sense the the SBA lender.
Also, there are some SBA lenders who will add a lot of extra working capital into the loan to help you ramp up the business/new location in addition to financing all payments during construction into the loan.
Residential assisted living businesses – aka Board and Care homes, Adult Care Homes, Adult Foster Homes (Adult Foster Care Homes) or Personal Care Homes – have become very popular across the U.S.
In Florida they are known as Adult Family Care Homes (AFCH’s) and in California they are commonly referred to as Residential Care Facilities for the Elderly or RCFE’s. They are also popular in Arizona, Texas, Washington, Oregon as well as many other states.
Group Home financing is also possible. The key to qualifying for SBA financing for a residential care home, adult foster care home or a group home is that you must provide some minimal amount of “healthcare or medical services,” and it can be very minimal. (See more about this below).
Assisted Living Facility Financing – 100%
If you are trying to figure out how to get funding to buy a care home and you are expanding an existing assisted living facility or residential care home business then 100% financing is available via the SBA.
The keys to qualifying for SBA loans for assisted living are as follows:
Good credit for any owners
Solid, consistent cash flow for your exisiting facilities/home(s) and solid consistent cash flow for the facility you are purchasing. It is possible to purchase an underperforming facility/home that doesn’t quite have strong enough cash flow as long as you can provide a solid plan to do so AND have the right experience to get a lender comfortable with your plan and your projections.
A long enough period of ownership for any existing facilities. i.e. it would be difficult to get 100% if you recently purchased a residential care home business and were looking to expand, but once you have owned the business long enough to prove that it can do well under your managment/ownership then you should be eligible to purchase another with no down payment.
*maximum loan amount for 100% financing for almost all transactions will be $5 million, but exceptionally strong borrowers/strong transactions can get 100% financing above $5 million.
Please contact me at jking (at) green commercial capital (dot) com or 1-800-414-5285 to discuss your situation.
* Credit is very important for any type of financing and SBA care home mortgages are no exception, however some derogatory accounts are acceptable as long as they are isolated. As an example, we were recently able to get a commitment for a client who was refinancing a facility in spite of the fact that they had a repossession a few years back. The loan worked because the repo was an explainable, isolated incident and it helped that the client had a lot of equity in the home as well as 100% occupancy and great cash flow.
YES, you can get an SBA loan after Chapter 7 or 13 and with some lenders after a Chapter 11 bankruptcy. This is because there are no “SBA rules for previous bankruptcies.”
Generally speaking, a previous bankruptcy would need to have been discharged for at least a few years before you could hope to qualify for a small business loan from an SBA lender.
SBA lenders will evaluate a loan request for someone with a previous Chapter 7 (or other type of BK) on a case by case basis because the Small Business Administration does not provide a lot of guidance to small business lenders re: whether or not a borrower with a past bankruptcy can qualify for a loan.
This is not a misprint; other than some specific rules regarding “a previous loss to the government on other types of loans (SBA, FHA, VA, USDA, etc.),” the SBA simply advises lenders to use good judgement and to have sound “credit policies.”
It seems counterintuitive that this would be the case in a such a rule-heavy type of finance, but getting a small business loan after bankruptcy is much more of an individual lender decision than anything else.
FYI: if you are thinking that an actual underwriter at some SBA office decides who does and does not get approved, well that is not necessarily the case, because many SBA lenders are authorized to underwrite, close and fund the loans themselves.
SBA Loan After Bankruptcy
How long a bankruptcy needs to be discharged is also up to the lender.
Some lenders will consider a borrower with a personal bankruptcy whether it was a Chapter 7 or Chapter 13after it has been discharged for at least 2 or 3 years, some 5 years and some not at all.
In fact, it is safe to say that the majority of SBA lenders willnot lend to someone with a bankruptcy. However, there are lenders who are more open minded about such matters and they will give you a shot if you present a good case.
FYI: A Chapter 11 business bankruptcy is harder to overcome, but again, depending on the circumstances and when it happened it is possible to get financing. There are many borrowers whose businesses were decimated during the Recession in 2008 or who suffered other catastophes in their personal or business lives that completely derailed their businesses and they ended up filing a Chapter 11 BK.
Many of these business owners have since recovered and have been able to get loans.
SBA Loan for Real Estate After Bankruptcy
Both the SBA 7a and the SBA 504 programs can be used to finance owner-occupied business property. Owner occupied means that your business will occupy 51% or 60% of the total square footage of the property depending on whether or not you are buying an existing building or doing ground up construction and both allow for borrowers with a previous bankruptcy to qualify.
100% Financing for Real Estate
There are some lenders who will approve an SBA loan after Chapter 7 (or 13 or even possibly an 11) for up to and over 100% of the value of a commercial property.
In fact, if the bankruptcy is old enough you might be able to get excellent terms. In other words, rates and terms that are just as good as for someone who does not have a past BK. If the BK is more recent than you might end up paying a bit of premium in rate, but it is rarely ever a truly bad rate.
You can also use an SBA 7a loan to buy or recapitalize a business (with or without real estate) even if you have a past BK.
See below for more info on what matters to a lender in these situations, but we have helped many clients in various situations with business purchase loans over the years and it all comes down to how the lender evaluates the risk in the transaction.
They will want to see that you are fully recovered and stable with regard to cash flow/income, personal credit and net worth (although the bar is not high from a net worth perspective) in order to approve a business loan after bankrutpcy.
For a good summary of what it takes to buy a business you might review my post regarding online businesses: e-commerce business loans.
SBA Loan Requirements re: Credit Score
Minimum Credit Score for SBA Loan
Contrary to what you might think, there is also NO minimum credit score for an SBA loan.
Again, not a misprint, but let me state that in a way that relates better to this post: SBA loans DO NOT have a minimum credit score for “regular” 7a or 504 loans.
A “regular” 7a loan is what I refer to as an SBA loan of more than $350,000 and the SBA does not require that you have a certain minimum credit score to obtain one of these loans. Some smaller SBA loans do require certain personal and business scores.
Keep in mind that even for loans over $350K that most SBA lenders will impose their own minimum score – usually somewhere between 620 and 680. If your score is lower, then the key is to find a lender that does not have a minimum AND is willing to work with you.
Credit Scores and Bankruptcy
If your score is lower due to a bankruptcy there are lenders that will consider your application for financing, but don’t misunderstand the fact that just because a lender does not have a minimum score, it does not mean they are going to approve “bad” loans. If you cannot put together a good explanation for the events that lead to the bankruptcy then you have no shot at getting financing.*
However, if you can lay out what happened, why it may have been close to the perfect storm, or why things got to the point where there was no coming back AND you can prove how you have recovered AND show why you are now a good risk, then a flexible SBA lender will be able to connect the dots and hopefully get you the financing you desire.
Please note that if you have a low credit score and you are looking for less than $350K you can still apply for a “regular” SBA loan as regular loans can be under or over $350K, but keep in mind that only the stronger transactions will be approved for a small loan with a low credit score as a lot of lenders do not like smaller loans as they are less profitable.
Don’t Believe Everything You Read
I need to editorialize here regarding the above info about the minimum SBA credit score, as it is different from what you might have read on some very highly ranked/seemingly authoritative websites or what some lenders might tell you.
Numerous websites make blanket statements re: the minimum credit score for an SBA loan and this is unfortunate. I believe this may be due to the fact that many articles re: SBA financing are published by people who do not work in the industry, and as a result they are doing a disservice to some who may actually be able to get an SBA loan after a bankruptcy or with a low score.
Also, if a lender is telling you that you need a minimum score then those lenders are telling you their guidelines, but they usually say it in a way that makes it sound like it is SBA policy for credit scores.
Bottom line: sometimes you just need to keep looking
What Kind of Rate Can You Expect After a Bankruptcy?
Good question…it is hard to know as everyone’s situation is different and each lender has different “bankruptcy guidelines.”
The older the bankruptcy and the better you and your business look on paper, the better the odds are that you will get a loan that is just as good as someone who does not have a BK. The less old the BK and the less great you look on paper, the worse the deal. Simple as that.
For a real estate loan you can get a 25 year loan and for non-real estate you can typically expect 10 years.
The good news is that no SBA loan offers terrible terms. Some might not be great, but even if you get stuck with a less than great rate – for example, the worst possible terms you can get on a “regular” 7a loan is typically a floating rate at Prime + 3%.
However, the beauty of the SBA 7a loan is that for loans under 15 years there is NO prepayment penalty and 25 year real estate loans have a very short and very reasonable penalty that allows you to refinance after just 3 years with no penalty or after 2 years with a 1% penalty.
A Bridge Loan of Sorts
So you can almost think of the 7a in this case as a bridge loan – a way to get from point A to point B – and for many people looking for a fresh start it is worth it to pay a slightly higher rate.
Business Loans After Bankruptcy
What You Need For Approval
Lenders can be fairly forgiving and Small Business Administration loans are a less risky type of loan due to the guaranty the lender gets from the Federal government, but you will need to prove your case, so to speak, or at least help a lender really understand what happened in order for them to seriously consider approving an SBA loan after a Chapter 7 or Chapter 13 – or possibly an 11.
The common misconception about SBA loans is that the Small Business Administration makes loans directly – they do not. Instead, they provide a “guaranty” to lenders for a percentage of the loan amount. It is kind of like mortgage insurance, and because of this “insurance” lenders can be more flexible in how they underwrite and what they approve.
With most SBA 7a loans, a lender gets a guaranty of 75% of what they lend out or 90% if the loan is an “Export Loan.” (An SBA Export Loan is a loan for borrowers who currently export or intend to export their products or services either directly or indirectly to countries outside of the U.S.).
FYI: with the 504 program, only the 2nd mortgage is guaranteed by the SBA, so at most there is a guarantee on only 40% of the financing with the 504. Because of the higher guaranty on the 7a, the lenders that make those loans tend to be more flexible in how they underwrite for a borrower with past credit issues.
It’s All About the Explanation
So in order to get an SBA loan after a bankruptcy, you will need to provide a make-sense, detailed explanation of what caused the BK and why you filed. You will have your best shot at approval if the events that lead to the BK were isolated to a particular time in the past (i.e. like the Great Recession) and if you can show that you have since rebounded.
Keep in mind that lenders are people too and they have seen it all before. They know that sometimes things happen and sometimes a bankruptcy is the way out, so if you lost it all years ago, but have a legitimate explanation for what happened and have clearly re-established yourself and your credit then you definitely have a shot at getting an SBA loan with some of the more forgiving SBA lenders.
SBA 504 Loan Rate With Previous Bankruptcy
IF you can qualify for a 504 loan then the good news is that the low rate 2nd mortgage will always be offered with excellent terms regardless of whether you have a BK or not. As of January of 2024, that rate is approx 6.35% for 25 years.
Keep in mind, the 504 is a 2 loan structure (typically 50/40/10) and the rate for the first mortgage could typically be anywhere in a pretty large range for someone with a previous bankruptcy and could be a fixed rate or a floating rate, but it will almost always have at least a 25 term or amortization.
Co Signer For An SBA Loan
It is worth noting here that only those who own (or will own) 20% or more of the subject business have to personally guarantee the loan, so if you have a recent or past bankruptcy and have others with the right experience and net worth who are willing to be a “primary” guarantor AND you can keep your ownership under 20% of the business then you might be able to sidestep the whole BK issue as most lenders will not require a credit or background check if your ownership is under 20%.
One exception to this is that the SBA requires lenders to do a background and credit check for anyone who is managing the business, so while this would require disclosure of a past bankruptcy it does not necessarily preclude you being involved IF a lender does not feel like you weaken the transaction AND if they feel the other guarantor(s) are “solid enough.”
I know this seems vague but some interpration of SBA underwriting rules can get a little gray and not all lenders interpet the rules in the same way.
You also need to be aware that SBA lenders are very vigilant about making sure they do not have a guarantor who is a “straw buyer/straw borrower,” who is standing in for the real buyer or borrower, so it is okay to partner with someone who is truly going to be deeply involved in the business but it is not okay to bring someone in to try and circumvent the rules.
I don’t want to sound like I am discouraging the use of co-signers, because it can be a very viable solution in certain situations, especially if there are multiple business partners with various skills and/or if you are financing a business that is less involved from a managerial standpoint.
For instance, we have helped many clients with SBA financing for self-storage properties where there are multiple borrowers/guarantors including one with a bankruptcy. Given that self storage (or RV and Boat Storage) are typically businesses that require little in the way of day to day management and can even be fully automated with no need for employees or managed by third party management companies, having one owner with less than 20% ownership and a past bankruptcy can be less of a factor for certain lenders.
A Note About A “Prior Losses to the Government” and “Deliquent Federal Debts”
To get an SBA loan after a Chapter 7 or other type of bankruptcy, there is one key guideline to know…if a Federal Government Agency (SBA, FHA, VA or others) took a loss when the bankruptcy was filed then it will be very difficult to get a loan.
Similarly, if you have “deliquent Federal debts,” for instance a Federally-backed student loan, then it will also be very difficult to get an SBA business loan after bankruptcy. (If you have a Federal loan or some type of federally “assisted” financing and it is more than 90 days late then it is considered delinquent).
Unless you can get a waiver from the SBA, the SBA will not guarantee a loan for a borrower who is delinquent or who has a “prior loss” and getting a waiver is very difficult.
Please contact me at jking (at) green commercial capital (dot) com if you need assistance understanding how you can qualify for an SBA loan with a previous bankruptcy (or other major credit issues) or visit our main site here for more info re: small business loans.
*FYI: It is important to note that even an older bankruptcy that has already fallen off your credit report needs to be disclosed because when an SBA lender does a background check it will turn up. This is because the background check covers a borrower’s entire adult life.
