SBA Lending

What is the SBA 7(a) program?
The SBA 7a program is a government guaranteed loan with a maximum loan amount of $2,000,000. As of today the SBA will guarantee 75% of the loan amount. In order for a borrower to qualify, the borrower’s business must occupy at least 50% of the commercial real estate to be financed. The program can be used for refinancing, acquisitions and construction. The loan program has the following typical loan terms:

-Up to 90% LTV (loans in excess of 80% LTV typically require additional collateral)
-25 year term and amortization for real estate related assets and improvements
-10 year term and amortization for equipment, working capital and business going  concern
-Rates ranging from Prime + 2.25 to Prime + 2.75% (as of 8/24/2010, Prime is
 3.25%)
-The prepayment penalty is 5-3-1
-The SBA guarantee fees:
  -Up to $150,000 2% of the guaranteed portion
  -$150,000 - $700,000 3% of the guaranteed portion
  -$750,000 - $2,000,000 3.5% of the guaranteed portion

What is the SBA 504 program?
The SBA 504 program can be used for the acquisition of commercial real estate. The loan structure consists of a conventional 1st mortgage that is typically 50% LTV. The second mortgage accommodates the remaining loan requirements up to an aggregate loan amount of 90%. The conventional first mortgage is retained by the bank. The second mortgage is held by the bank for a 2-3 month interim period and is then purchased by the SBA. The lender is left with the 50% LTV loan.

-Up to 90% aggregate LTV (single purpose properties are typically capped at
 80% LTV)
-The first mortgage typically has a 25 year term and amortization
-The second mortgage has a 20 year term and amortization
-The first mortgage typically adjusts every 5 years at 3.75 – 4.25% over the 5-
 year Swap rate
-The second mortgage is fixed for the life of the loan; the rate as of today is
 approximately 5.15%
-The first mortgage typically has a 5 year prepayment penalty
-The second mortgage has a declining 10 year prepayment penalty
-The SBA fee is 3% of the second mortgage loan amount

What their pros and cons?
SBA 7a pros:

-Typically a faster turn-around time if working with a preferred SBA lender
-The loan only has a three year prepayment penalty
-The loan can be used for refinancing as well as acquisitions
-The loan can be used for non-real estate sources and uses

SBA 7a cons:

Many banks only provide quarterly adjustable 7a loans. However, some do offer fixed rate 7a loans.

SBA 504 pros:

The first mortgage is typically fixed for at least 5 years and the second mortgage is fixed for the life of the loan.

SBA 504 cons:

-The process of obtaining a 504 can be more time consuming
-The program may not be used for refinancing or non real estate assets
-Ten year prepayment penalty on the second mortgage