Were you a small business owner who felt the pinch in your business a few years back? Did you own your small business real estate with equity you used to borrow against to help you through the crunch times? Perhaps your lender felt the need to lend you the funds to keep afloat, because of their existing investment in your business with other loans. Perhaps they felt that being out on the limb with you meant staying the course as long as you could provide collateral with equity for borrowing the additional funds. You invested in the ownership of your small business property, so you could build equity for your retirement. You never thought you would have to tap that equity to save your business, but 2009 and 2010 happened, and your business came to a standstill with the economic times. You bit the bullet, and you borrowed against that equity to save and grow your company during times when you needed more working capital in the company. Your lender was not exactly accommodating with a good rate or long repayment terms, but the cash was a life saver.
The imaginative story above represents just one situation where a small business owner found himself with onerous monthly payments on his small business property. The story could have been one where the factors were all very positive for the growth and enhancement of the company, yet the company accepted a short term repayment program, or a higher interest rate, because it was the easiest capital to access quickly. When the business recognized the benefits it can experience from lower payments and longer repayment terms, SBA financing became attractive. SBA financing may also appear attractive to the small business owner whose short term real estate loan comes due on a balloon balance with their bank. Banks by nature are short term lenders, and they typically style their repayment terms to include a balloon balance owing after the loan matures in three years or five years. To the small business borrower, the balloon feature represents loan renewal risk. The small business owner does not know who will own the bank, who will be in charge of management of the bank, the state of the economy, or the interim condition of the business at the time the balloon balance comes due and ready for renewal. They don’t know for sure whether the bank will renew the loan.
With SBA loans, if over half of the loan proceeds were originally used to purchase or renovate real estate, the SBA loan is eligible for a 25 year repayment term. The SBA real estate loan is a permanent mortgage with no balloon balances or loan renewal risk. In addition to financing or refinancing small business real estate costs, the 25 year SBA real estate loan can also provide funds for working capital, new business equipment, renovations, or business expansion. An SBA loan can be a very versatile small business real estate loan!
The primary mandate for an SBA lender contemplating refinancing of small business real estate loans is that SBA requires the lender to provide a lower interest rate and/or longer repayment terms such that the small business borrower can lower their payments by at least 10%. The savings in the loan payment is considered a method for freeing up working capital to grow the business, and that causes the SBA loan request to be eligible in accordance with refinancing guidelines.
For whatever reason the small business owner wants to stretch out their loan terms and lower their payments, the SBA loan program can be a good option. In general, SBA loans offer small businesses with lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans. A small business borrower that maintains healthy deposit balances and has a long track record with their banker may not need SBA financing. Unfortunately, in a time where more big banks are taking over the small community banks, accommodations for small business financing becomes more and more challenging. It is much easier for the big banks to accommodate middle market and public companies. The SBA loan program continues to be a life line for many small businesses. Because of the volume of small businesses that contribute to the health of the U.S. economy, the SBA loan program remains a significant economic engine for job growth at home!