What Is A Small Business Administration Loan?
Once your commercial property offer becomes approved, small-business entrepreneurs will investigate your conventional bank loan. With the success rate for getting a conventional loan as low as 30%, borrowers desperately look for alternative financing options that align with their business needs. Most often, borrowers choose to pursue small business administration (SBA) loans. SBA loans are not direct loans, but they do provide guarantees on loans originating from the agency’s partner lending institutions. These institutions typically include banks and certified development companies referred to as CDCs.
If you are planning to start a business or expand an existing business the financing professionals at Hunt mortgage group can help. According to SBA.gov, SBA participates in a number of loan programs designed for business owners who may have trouble qualifying for a traditional bank loan. Before you start the process of applying for an SBA loan, let the experts at Hunt Mortgage Group fill you in on some imperative information.
Identifying the SBA Loan Programs
To finance commercial real estate, the SBA supports two core programs: CDC/504 and 7(a). The lending requirements are tighter today due to the United States economic downfall. Furthermore, small businesses are still considered a lending risk. When it comes to finding the right rate, short-term, fixed or fixed-to-floating rates on conventional loans are the most common interest rate options for small businesses.
The SBA CDC/504 loan provides a loan guarantee from the federal government. With 504 loans, a bank provides 50 percent of a project’s total cost with the CDC providing around 40 percent of the cost; this leaves the borrow to contribute 10 percent as a down payment. This structure is attractive to banks as it is a lower risk including the CDC, as well as a federal guarantee.
Categorized as a general-purpose loan, an SBA7(a) also provides a loan guarantee from the federal government. With the 7(a) loan, a bank receives a 75 percent loan guarantee from the federal government for loans exceeding $150,000. So according to financial experts, a bank can essentially return the loan to the federal government and receive a payment of $750,000 on the $1 million loan.
For banks, an SBA 7(a) loan means eliminating large dollar amounts on their books as a nonperforming loan. This is a beneficial tool in managing a bank’s balance sheet and loan-loss reserves. Ultimately, 7(a) loans offer an effective way to finance your small business.
What Is The Ideal Size Of An SBA Loan?
The SBA CDC/504 loan is a great option for financing larger projects. For projects in need of a loan for $20 million and higher, look into your CDC/504 loan options. The 7(a) loan is best suited for smaller loans because the maximum limit for an SBA loan is $5 million. According to a 2016 fiscal report published in “Scotsman Guide,” the SBA approved more than 70,000 loans from the 504 and 7(a) programs, totaling nearly $29 billion.
Understanding SBA Interest Rates and Terms
The CDC/504 loan offers a fixed rate set at the time of funding, which often falls below market rate. According to financial experts, the interest rate on a 504 loan was less than 5 percent for 24 consecutive months. The 7(a) loan typically features an adjustable variable rate, which you can negotiate with your lender. Experts also say that the CDC/504 product offers a 20-year fully amortized term. The 7(a) loan maximum typically lasts for about 25 years. However, both programs offer a 10-year term for large equipment purchases.
Financing SBA Loans With Hunt Mortgage Group
Are you considering applying for an SBA loan? The low annual percentage rates make the SBA loan programs a smart way to fund your company. With this information and some preparation, you may be able to secure some of the lowest business financings out there. For more expert financial advice, contact a professional at Hunt Mortgage Group today!