SBA 7a:  Bridge Financing or Good Long Term Loan?  Or Both?

It’s pretty much an accepted fact that small and mid-sized businesses are still having a hard time getting access to capital and many banks (unless they are active SBA Lenders) aren’t much help unless your business is rock solid and hasn’t skipped a beat these last few years.

What many business owners and a growing percentage of banks have figured out is that the 7a loan program is a very versatile and much more “approve-able” loan than a conventional bank loan or line of credit.

What’s to like about the 7a:

1. if a large enough percentage of the loan proceeds include real estate, then you can get a 25 year fully amortizing loan with no balloon.
2. it is available for any legitimate business use including business debt consolidation and working capital.
3. 7a loans are “cash flow” loans, so if the business has good cash flow it is usually eligible for financing.
4. it is much more “approve-able” than a conventional loan because of the SBA guarantee provided to the bank/lender.
5. you can sometimes get it fixed for 5 years or even 25 years at a time…although a 25 year fixed rate is very difficult to come by, and if a lender likes you enough to fix the loan for 25 years then you might qualify for conventional financing.
6. lenders like the loans because they are typically very profitable.
7. the loans only have a 3 year prepayment penalty and the last year is only 1%.
8. The lender gets the benefit of the SBA guarantee during construction, so it is one of the few ways that lenders are even willing to consider construction projects.
9. it is available up to $5 million.

What’s not to like:

1. SBA loans have a “guaranty fee” sometimes above 3.5% of the loan amount, which can be an awful lot of money on a large loan.  As painful as this can be, keep in mind that:

• the fee is financed into the loan
• the SBA 7a might be the only financing you can qualify for at the moment – or it might be the only type of financing that truly meets your needs.
• the program could not exist without it.

The second reason the loan might not be ideal is that the 7a loan is almost always a variable rate pegged to Prime.

This is why I say it makes for good, bridge/temporary financing, because Prime – while at an all-time low at the moment – will eventually go up, but given the state of the market (and the fondness that banks and lenders have for the program) it might be the only type of financing offered to you.

This is why as a business owner you need to be aware of what you are getting into.  Sure, it is not uncommon for a bank loan to be pegged to Prime, and sure you are getting a great rate now because Prime is so low…and sure, the Federal Reserve has said that they will not touch short term rates until at least 2014…but we all know that your rate will rise if and when the economy recovers.

So What Do You Do?

The best advice is to take the loan now assuming it is right for the needs of your business, but if you are uncomfortable with an adjustable rate loan, then mark your calendar for 2 to 3 years out to look into refinancing when the prepay penalty is only 1% or expired…or work with a good SBA loan consultant who will remind you to do so 😉

In other words, use the loan as bridge financing to refinance your building or your business, but be aware that you may need to re-address the situation in a few years.

Hopefully, the economy will continue to recover and financing will loosen up over the next 3 to 5 years anyway and you will have more options when the time comes.  And if the economy doesn’t recover for a while, well then Prime will stay low anyway and you won’t have to worry about your variable rate.

By the way, you can also prepay the principle on the loan up to 25% per year.

Please Click here for more information about the 7a loan program.