Today’s SBA loans can spur years of growth

If I’ve learned one thing in my nearly three decades in banking, it’s this:  People like money that’s almost free.

A lot.

So it’s not surprising that lenders who are skilled in Small Business Administration lending are exceptionally busy right now, working with borrowers who are hurrying to take advantage of the lowest SBA borrowing rates that most of us are likely to see during our careers. 

The historically low rates are available to borrowers who hope to use the SBA’s 7(a) program, which is typically used to acquire a business, as well as borrowers who use the SBA 504 program, the one that finances purchases of buildings or equipment to be used by a business.

For many business owners who are penciling out the potential return on deals that rely on an SBA loan, the exceptionally low interest rates are creating a strong sense of urgency. Transactions that had been on the fence as owners cautiously sorted through the implications of the COVID-19 pandemic now are moving forward.

How low are rates? For 7(a) loans — again, those are the ones used to acquire a business — the maximum interest rates as of November 2020 is 6 percent.  (The rate on those loans is set at a maximum of 2.75 percent above the prime rate.) For 504 loans to buy buildings or equipment, borrowers are finding a rate of 2.58 percent on the 40 percent of the purchase price financed by SBA. The portion financed by a commercial lender typically is carrying a rate somewhere around 4.5 percent. In past years, experienced SBA lenders who saw rates like that would have assumed that they had spotted a typographical error.  

SBA loans, however, aren’t for every business borrower. A business owner who wants to buy an office building for her business but can’t come up with the 25 percent down payment required by many traditional loans is an excellent candidate for an SBA 504 loan. It requires only 10 percent down — a level that allows the owner to maintain sufficient working capital for operation of the business.

But a business owner with lots of liquidity, one who can easily make a 25 percent down payment, probably isn’t a good fit for an SBA loan.  The federal agency requires that lenders show that the borrower couldn’t get financing elsewhere, and a financially strong borrower generally has other options.

A SBA loan isn’t a good option, either, for a struggling business. Despite a common misunderstanding, SBA loans are not last-resort financing.  Instead, owners of struggling businesses likely need to take a deep look at their business model. And, if the business still makes sense, the owners probably need to look toward friends and family — or maybe a home-equity loan — rather than financial institutions to provide the capital they need to get the business stabilized.

Borrowers who hope to use SBA financing to acquire an existing business, meanwhile, need to be aware that the SBA tightened its lending requirements. The federal agency now requires that the buyers put up at least 10 percent of their own money when they’re using SBA 7(a) financing to acquire an existing business. Before the SBA tightened the reins, some lenders were using a combination of SBA lending and seller financing to essentially provide 100 percent funding. Poor decision-making and high levels of defaults resulted from the looser lending standards. At Plumas Bank, we believe that down payments of 15 to 20 percent are important to keep a borrower’s attention focused on the success of the business.

Even though requirements for cash down payments have tightened, the SBA program often is the only bank financing that’s available to acquire an existing business. Traditionally, most commercial banks have viewed the acquisition of an existing small business as a transaction that’s almost the same as a start-up business. And banks almost never make loans for startup businesses.

A community banker, one who looks to establish a long-term relationship that helps a business grow, is a necessity to any business owner who wants to take advantage of SBA’s attractive financing without spending hours upon hours learning about federal programs.

Business owners who have been undecided about their next move now have a powerful incentive to get moving on transactions that rely on SBA financing. For confident, savvy business owners, the inexpensive financing available today will provide a solid base for years of future business growth.

 

Read about SBA loans.

 

_{*Rates, fees and borrower information in this article were current at the time of publication and are provided for illustrative and educational purposes. Contact your Plumas Bank loan officer for today’s rates, fees and lending information. Member FDIC. Equal Housing Lender.}