What is the maximum SBA loan amount? The answer: “It depends.”
It could be $5 million, $10 million or $15+ million.
- It depends on whether you are financing a building, commercial property or expensive equipment or if you are financing goodwill.
- It depends on which SBA program you are considering using – the 504 or the 7a, and…
- It depends on how much of a down payment or equity you have or if you are looking for a loan with no down payment.
This is a somewhat complicated subject, so I will start with the simplest answer/scenario first…
Maximum SBA Loan For Business Purchase/Buying A Business or a Partner Buyout
If you are buying a business without real estate (i.e. only goodwill/blue sky, non-real estate assets) or perhaps buying out a business partner, then the answer is pretty straightforward: you can borrow up to $5 million using the SBA 7a program. HOWEVER, if you have a strong transaction with many of the qualities an SBA lender likes to see (relevant experience, good credit, solid cash flow, etc,) then it is possible to borrow up to $10 million (yes, $10 million) with certain lenders who will put a conventional 2nd mortgage behind the SBA guaranteed first.
Maximum SBA Loan for Commercial Real Estate/Commercial Property*
The maximum SBA loan amount for real estate, heavy equipment or long life machinery under the 504 program is for all intents and purposes approximately $16 million with 20% down/20% equity or $11.25 million with 10% down/10% equity. (The 504 program allows for larger loans than the 7a and also requires a down payment, whereas the 7a allows 100% financing in many situations).
Interestingly, the maximum loan is dictated by the size of the 504 second mortgage.
The SBA guaranteed portion of any 504 loan financing offer is actually just the second mortgage which has a max amount of $5 million unless your loan qualifies as an SBA Green Loan or if you are a manufacturer, in which case the maximum 504 loan amount is $5.5 million. FYI: the SBA defines a manufacturer as a “for profit” U.S.-based business that produces a product using mechanical, chemical or physical processes. i.e. a business that makes something and sells it.
The 504 loan “size” is determined by an SBA rule that states that the 504 (2nd mortgage) loan can be no more than 30% to 40% of the total financing for a commercial property (or equipment). And since the most traditional structure for a 504 loan transaction is what is referred to as “50/40/10” with an SBA lender providing the “50” in the form of a first mortgage and the SBA** providing a second mortgage for the “40,” we are left with a simple math equation to back into the “maximum SBA loan amount.”
Example of the Maximum SBA Loan with a SBA 504 Loan Structure and 20% Down:
Purchase Price of Building: $20 million
50% First Mortgage: $10 million
30% SBA 504 Loan: $6 million
20% Down Payment: $4 million
Maximum SBA Loan – SBA 504 Loan Structure with 10% Down:
Purchase Price of Property: $12.5 million
50% First Mortgage: $6.25 million
40% SBA 504 Loan: $5 million
20% Down Payment: $1.25 million
Again, these numbers can be tweaked slightly higher if you are getting an “SBA green loan” or if you are a manufacturer and technically they could go even higher if a first mortgage lender were willing to go above 50% of the total “project cost” (which lenders will do for businesses with truly strong financials) as the SBA actually allows lenders to go up to 60% at their discretion.
SBA 7a Maximum Loan Amount
SBA 7a loan requirements are very different from the 504, and the program is far more popular due to the flexibility it provides, the higher guaranty the lenders get from the SBA and because (frankly) it is typically way more profitable for lenders. I know it is hard to imagine that profitability might have an impact on whether or not a lender approves a loan, but it can 😉
Anyway, for almost every 7a lender the maximum loan they will consider is $5 million, but there are a few unique lenders who, as alluded to above, will actually consider “piggybacking” their own conventional 2nd mortgage behind a $5 million 7a loan in order to get a larger transaction closed.
These lenders will only consider this for “strong” transactions whether they be a business acquisition or a real estate loan (or both) and they will do so up to $10 million with one potential caveat being that in some cases you might need additional collateral (typically equity in real estate).
Additional collateral might be needed if there is a minor weakness in the transaction (cash flow slightly lower than the lender would prefer, borrower’s experience slightly lacking, credit issues, etc.) or in some cases if the loan is for ground-up construction and too much of the loan is unsecured. Each loan is different and your mileage may vary, but the key takeaway is it is very possible to borrow up to $10 million using the SBA 7a loan if your loan request has enough positives/strengths.
SBA Maximum Loan Amount By Way of a “Lower Guaranty”
An SBA lender can also opt to take a lower “guaranty” under the 7a program. The typical guaranty is 75%, but an SBA lender can opt for a lower guaranty in order to acheive a higher loan amount for larger transactions. You will occasionally see lenders do this to accommodate a transaction over $5 million. It is not typical and again, reserved for only stronger transactions but it is something that is done.
Similar to the 504, this is a function of backing into the maximum allowable SBA loan based on the available SBA guaranty. The maximum SBA loan guaranty to any business is $3.75 million and for most lenders this means a maximum loan amount of $5 million because if you divide $3.75 million by .75 (because of 75% the SBA guaranty) you get $5 million.
So, if a lender feels strongly enough about a particular borrower/transaction they can take a lower SBA guarantee and leverage it into a higher loan amount. For instance, let’s say a borrower needed a loan amount greater than $5 million, did not want to put more – or anything – down and the lender did not want to provide a 2nd mortgage. The lender instead could take a lower guarantee and make it work.
As an example, last year one of our lenders offered 100% financing to a doctor looking to build a new office with a total loan amount not to exceed $5.575 million. They got to this amount by taking a guaranty of just 67.3% vs. the usual 75% because they felt like the doctor was very established, had great cash flow, credit, etc. and was therefore worth the risk.
How Do SBA Loans Work?
Will all this discussion about the SBA guaranty, I should clarify what it is. Basically, the SBA operates like a mortgage insurance company. Lenders make loans that the SBA guarantees up to a certain percentage of the loan amount as long as lenders underwrite according to the SBA rules, so in the case of a borrower default the SBA pays the lender a percentage of what is still owed on the loan which could be anywhere from 30% to 90% of the total financed amount depending on whether it is a 504 or 7a loan and how it was originally structured.
This is very similar to an FHA loan if you’ve ever had one for a home or investment property. With FHA loans there is an “MIP” (Mortgage Insurance Premium) that is a small percentage of the loan amount, paid by the borrower and rolled into the loan. The SBA works the same way. Every borrower that gets either a 7a or a 504 loan pays a fee that is rolled into the financing. Without this fee the programs would not exist.
Really getting into the weeds now, but there is also a way to increase your odds of getting a large 7a loan amount and that is if you are an exporter since exporters get a 90% guaranty from the SBA, so in this case, the lender is making a loan and getting a $4.5 million guaranty which dramatically reduces their risk on a loan and as you might imagine, increases the odds for approval.
A Note About SBA Loans During a Recession
At the time of this writing (March 2020), Congress is considering passing legislation that could temporarily increase the maximum SBA loan guaranty on 7a loans from 75% to 90% due to the impact of the Coronavirus.
If this legislation passes then it could theoretically be easier for businesses with decent cash flow (in spite of what looks like an oncoming recession) to qualify for maximum 7a financing as, similar to an SBA Export loan, the 90% guaranty gives lenders a better “insurance policy” on the loan making the loan less risky. The major caveat in this situation is your business has to be of the type that a lender feels will successfully survive the current recession.
Congress also raised the guaranty during the last Recession and it helped a lot of borrowers. They are also considering waiving the SBA Loan Guaranty Fee (the fee charged on all SBA loans) for approximately 1 year, which could be a huge savings for many small businesses.
Keep in mind that this is not the same as an SBA Disaster Loan which is a completely different program designed to help businesses severely impacted by the coronavirus. Here is a link to the SBA website re: those loans: SBA Disaster Loans. At this time, we cannot help if you need one of these loans as they are not being processed by lenders but by the SBA directly. It is logical to believe, however, that many of our lenders will consider a refinance to consolidate debt and with “cash out” for working capital for businesses that a well positioned to bounce back once things return to normal assuming you can meet the SBA’s refinance requirements.
Obviously, figuring out the max SBA loan or figuring out if your business is eligible to refinance it’s debts and/or recieve some working capital or simply how much of a loan your business can qualify for can be complicated and confusing, so if you have any questions feel free to e-mail me at jking (at) green commercial capital (dot) com or give us a call at 1-800-414-5285.
*The SBA programs CANNOT be used for “investment property” financing (other than self storgage, Boat and RV storage, hotels and in some cases RV Parks, campgrounds and mobile parks if the majority of the income is derived from “short term stays”), so you cannot finance multi-family, apartments, multi-tenant properties, etc. UNLESS your business legitimately occupies at least 51% of the total rentable square footage of the building. For example, if you need a loan to buy a grocery store that occupies more than half of a strip center, then the entire strip center is financeable with the SBA. Or if you are purchasing or refinancing a building that your business will occupy 1 or more floors of and there are residential or commercial tenants upstairs then that can work, but your business must legitimately occupy more than half of the total square footage.
**SBA 504 2nd mortgages are actually underwritten by a Certified Development Company – or CDC – a local non-profit authorized to originate loans for the SBA.