Big changes for SBA loans

Recent legislation has increased the maximum SBA loan amounts up to $5,000,000 for the SBA 7(a) loan program and the SBA 504 loan program.

The SBA 7(a) program can be used for a broad variety of purposes such as real estate purchase, debt refinance, equipment purchase, business acquisition and working capital. A bank lends the borrower the money, and the SBA guarantees a portion of the loan.

Rates on a SBA 7(a) loan are a variable rate usually tied to prime and adjusting on a quarterly basis.

The term of the SBA 7(a) loan is based upon the use of proceeds as follows:
Real estate purchase or real estate debt refinance- 25 years
Debt refinance- 10 years
Equipment purchase- 10 years
Working capital- 10 years


The SBA 504 program is for real estate purchase or construction. A 504 loan consists of a conventional bank first trust deed and a SBA debenture in second trust deed position. Rates on a 504 loan are fixed.

The typical 504 structure is usually:
Down payment- 10%
Bank 1st- 50%
504 2nd- 40%

With the debenture now going up to $5,000,000, a SBA 504 loan could conceivably finance a real estate deal up to $12,500,000.

Not only has the loan amounts increased, so has the SBA definition of a small business. Now for both the 504 and 7(a) loan programs, SBA defines a small business as one where the net worth of the company does not exceed $15,000,000 and the net profits of the company are less than $5,000,000 averaged over the last two years.

This increase in loan size and the definition of a small business may very well keep small business afloat during the coming tidal wave of commercial real estate debt that is coming due.

Most commercial estate real loans are not fully amortized. They typically have a balloon come due in five years. As commercial estate declines in value, many borrowers are unable to refinance their commercial estate loan since the loan to value is now too high.

Any commercial real estate loan with a balloon is eligible for refinance with a SBA loan. The owner of the property just needs to also be the owner of the business occupying the building.

The primary qualifying criteria is not loan to value but cash flow. As long as the business can generate sufficient cash flow to repay the loan, it is a viable candidate. Business cash flow in the SBA lending world is typically defined as net profits plus depreciation plus rent (if rent is paid to the owner).

The fully amortizing nature of SBA loans makes them one less thing for borrowers to worry about.