Common Misconceptions about the 7a program

I spoke to a borrower the other day wanting to financing the purchase of an existing franchised business. This was what I would classify as a "Tier 1" franchise with several hundred locations across the country mostly performing well. The borrower was putting down 20%, had excellent related industry experience and good credit but the lender that they were working with told them that there wasn't enough collateral for them to issue a 80% loan.

There is a misconception out there that the SBA sets collateral coverage requirements under the 7a program and I am here to tell you that is not true. The SBA guidelines require that all available business assets are pledges as collateral. If the business assets alone are not sufficient to fully collateralize the loan then the SBA will require that the lender have the borrower additionally pledge personal assets as collateral. Typically the only personal assets that would be tied up with the loan would be real estate (either your primary residence, investment real estate, or a combination of both). The lender would place an indemnity deed of trust (IDOT) against the property and this lien will normally be against the property until the loan is paid off.

Simply put, the SBA doesn't set collateral coverage requirements. They only require that all available personal collateral are taken if the loan is not fully collateralized on a "dollar for dollar" basis by the business assets. Now that doesn't mean that each lender that participates under the 7a program doesn't set their own collateral requirements. Many lenders set specific ratios that they try to hit. Example--Bank A requires that the loan be at least 50% secured by real estate while Bank B may not require any real estate collateral. There are many reasons why lenders vary with this respect but more often then not it is a function of the lenders unwillingness to trigger the guarantee in case of default and profitability.

Many lenders do not want to have to go back and collect on the loan guarantee because it can bring into question their ability to assess risk in the underwriting process. If a bank has a lot of loans go bad in their portfolio and they go back to the SBA to collect on the loan guarantee, it can open the lender up for further scrutiny and possibly jeoparadize their PLP status (if they have it). Some lenders would rather take the loss and keep a "clean track record" with the SBA. With respect to profitability on a 7a loan it is important to keep in mind that a lot of lenders do not hold and service loans they originate in their own portfolio. These loans are often sold to other banks or investors. Assuming similiar interest rates, the greater the amount of real estate collateral in the loan, the more the loan can be sold for and the greater the premium for the originating lender.

In summary, do not be deterred if a lender declines your loan because of lack of collateral. This doesn't mean your loan isn't SBA eligible, it simply means that your loan doesn't fit within the underwriting guidelines of that particular lender.

Most common loan programs and the typical borrower

Why Choose Us?
At Griffin Capital we understand the needs of the small business owner and the hurdles they face everyday. Most importantly, we understand the commercial lending environment because commercial loans are the only types of loans that we offer. Just because a bank may have turned down your loan does not mean it’s a bad loan, only that your loan does not meet their guidelines. The services that we offer include:
· Business plan analysis
· Credit analysis
· Pre-underwriting the loan
· Loan packaging and presentation
· Negotiating loan terms
· Arranging third party work
We want your business!

For more information on SBA loans you can send an email to mbrewer@gcfunding.com or call us direct at (800) 710-6762 xt. 105 or visit us online at www.sba-lending.com

Our corporate office is located at:
Griffin Capital Funding312 Progress StreetSuite 300Fredericksburg, VA 22401

About Us
Griffin Capital Funding is a lender and broker of commercial loans. Our SBA loan officers are all former bankers and pride themselves on understanding the needs of small business owners. We do not do any residential origination. As such, our focus is clearly centered on commercial lending. We pride ourselves on NEVER taking any upfront fees, or earning a fee unless you close your loan on terms acceptable to you. Let us put our expertise to work for you.

Financial benefits of a SBA loan include:
Less money down—Because of the enhancement provided by the SBA guarantee, you can put less money down and better leverage your investment capital. Sometimes up to 100% financing is available
Longer repayment terms—A SBA loan allows for a longer repayment period than most conventional loans, enabling you to keep your payments low and improve cash flow. Loan terms up to 25 years are available
No balloon payments—You will not be forced to refinance your SBA loan at any time.

Examples of a typical SBA borrower include:
A borrower who wants to buy a business with our without real estate who does not want their loan amount limited to the “hard collateral” value
A borrower that wants to purchase or construct a commercial building and wants up to 90% financing
A borrower purchasing or starting a business with little collateral
A borrower who wants to finance the majority of closing costs into the loan
A borrower wanting to buyout a partner or buy a professional practice and wants 100% financing

SBA 7(a) Loan Guarantee Program
The SBA 7(a) program is the flagship loan program provided by the Small Business Administration. This program was designed to help provide small businesses access to debt financing that they could not obtain through a conventional bank loan. The SBA helps mitigate the lenders risk by guaranteeing a portion of the loan.
Who can apply
For profit businesses that qualify as small under SBA size standards. The SBA will not issue a loan guarantee for investment or speculative purposes. Real estate that is financed with a guaranteed loan must be at least 51% owner occupied.
Use of proceeds
SBA 7(a) loan proceeds may be used to purchase machinery, equipment, furniture, fixtures, real estate, inventory, and supplies. Loan proceeds may also be used for leasehold improvements, working capital, and other eligible project costs. Refinance of existing debt is allowed as long as the refinance provides a “substantial benefit” to the business. A substantial benefit can typically be demonstrated by refinancing debt with a balloon feature, or by improving cash flow by at least 20%
Loan proceeds may NOT be used to finance floorplan needs, pay delinquent taxes, or finance the purchase of a partial interest in a business.
Loan terms, fee, and collateral requirements
Typical loan terms are 5 to 7 years for working capital, furniture, fixtures, inventory and supplies, up to 10 years for equipment, and 25 years for real estate. In circumstances where there is a combination of various collateral components, the lender will typically calculate a term based on the weighted average of the collateral. It is common for a lender to place a lien on the borrowers primary residence, or other real estate collateral if the lender is not fully collateralized.
The interest rate under the 7(a) program is a variable rate spread over the Prime rate. The maximum spread allowed by the SBA is 2.25% for maturities under 7 years and 2.75% for maturities over 7 years. The SBA charges a fee for the loan guarantee and this fee is generally built into the loan. The loan fee is a tiered structure that is based upon the guaranteed portion of the loan.


SBA 504 Program
The 504 program is a fixed asset program that provides loan term financing for real estate, or equipment with a minimum 10-year useful life. This program utilizes two loans: a 1st trust issued by a bank or non-bank lender and a 2nd trust issued by a Certified Development Company (CDC)
Who can apply
For profit businesses that qualify as small under SBA size standards. The SBA will not issue a loan guarantee for investment or speculative purposes. Real estate that is financed with a guaranteed loan must be at least 51% owner occupied.
Use of proceeds

Proceeds may be used for the purchase of fixed assets only. Proceeds may not be used for refinance of fixed assets or for the purchase of other assets (such as inventory, furniture, or goodwill)

Loan terms, fee, and collateral requirements

Typical loan terms are 10 years for equipment and 20 years for real estate. The maximum participation of the CDC (2nd trust lender) is 40% of the total project costs, 35% if the business is less than 2 years old or if a limited use facility, and 30% if new business and limited use facility. Minimum equity injection by the borrower is 10%.

The lender sets the interest rate on the 1st trust. As their loan to value is generally 50% or less, they must offer an attractive rate to be competitive. The marketplace sets the interest rate on the 2nd trust. 504 debentures are typically sold monthly in the open market to investors and you can access historical 504 rates at http://www.nadco.org/nadco/DCFC/DCFCIndex.html

For more information you can visit us online at www.sba-lending.com

SBA Loans

SBA Loans are loans that are guaranteed by the government but the money does not come from the government.