SBA Loans vs. Conventional Financing

To a novice borrower, the SBA lending world can oftentimes be quite confusing, and borrowing can seem a daunting task. But, with the right SBA lender, the process can be manageable and, in most cases, very similar to that of a conventional loan. In this article, I will be discussing commercial real estate purchases; however, many of these concepts can be applied to any SBA-eligible use of funds. The question is: Why use SBA?  

During my 17 years as an SBA lender, I have concluded that the SBA provides 3 key benefits to a small business:

• 1. The ability to preserve cash
• 2. The ability to maximize cash flow
• 3. The ability to maintain personal control your small business

Allow me to elaborate on each of these benefits:  

The first and, in my opinion, most important reason to use an SBA loan is the ability to preserve cash. Conventional financing typically requires 15-25% down on the purchase price, not including other project costs such as renovations, moving costs, and closing costs. SBA loans on the other hand, require no more than 10% down payment of the total project cost in most cases.

For example, if you are buying a building for $1,000,000, and there are renovation and closing costs of, let’s say, $150,000 for a total project cost of $1,150,000, an SBA loan may allow you to put only $115,000 down, or 10% of the total project. A conventional loan would likely require $150,000 towards the purchase, plus possibly funding your own renovations and closing costs for a maximum out of pocket of $300,000. The SBA loan would allow you to preserve potentially $150,000 cash, providing additional capital to grow your business.

The second reason to use an SBA loan is the ability to maximize cash flow. This is simple: SBA loans offer 20-25 year payment terms compared to 15-20 years on conventional loans. Longer loan term equals lower loan payment, calculating to increased cash flow.

The third reason to use an SBA loan is your ability to keep control of your business. Unlike conventional loans, SBA loans do not require the lender to place any loan covenants on your loan, while also not allowing for balloon payments or call features.

In a nutshell, your SBA lender can never tell you how much you can pay yourself, how your balance sheet needs to look, or exit you, based on a ballooning note or change of appetite for a certain industry. Once you sign for a 25 year SBA loan, you have an SBA loan for 25 years no questions asked. Well…as long as you make your monthly payment, that is!

So there you have it! If you want to purchase an owner-occupied commercial real estate property, put a maximum of 10% down, maximize your cash flow, and keep the banks from exuding any control over your business, give me, Tom Maiale at CBC National Bank, a call at 239-288-9966, so we can discuss your individual business needs.