Help with SBA 7(a) Process

[Evan Scott]

Hello everybody,

This forum has been incredibly helpful lately. I was looking to get some more information/help from people experienced with the SBA 7(a) loan process.

My business partner and I recently formed an LLC in the state of Illinois and we are looking for a loan to purchase commercial real estate that will be used as our HQ (which is what 7(a) loans are intended for).

What is confusing to us at the moment is how collateral and LTV are looked at in this picture. The property we are looking at will require significant rehab, which is allowed for within the 7(a) loan terms. The total cost of the purchase and rehab will be around 1.4-1.6mm (based on numerous estimates). With these numbers, is the loan not to exceed 90% of this amount, for example (ie 90% LTV), or are we supposed to somehow prove that we have at least 10% of that amount in cash/liquid assets on hand (say $160k).

Both myself and my business partner have enough cash on hand to cover 10% of the loan, but if possible, we do not wish to have to put this into an escrow or transfer the cash for various tax reasons. The vague wording is confusing as to whether we need to put up this 10% into some account in advance or whether this is simply a number thrown around. It would not make much sense to have to post this amount, only to receive a much larger amount of cash immediately after.

I hope my wording here wasn't too confusing and I could get some help with the topic. Small business financing, at the moment, is not my area of expertise so any help is greatly appreciated.

[Darryl Dahlen]

One mistake I see people make with SBA loans is they look to what the SBA will allow and not what the actual lender will do. In most cases, the difference is quite large.

Meaning, just because the SBA will allow up to 90% financing on 7a loans does not mean the bank is obligated to do so. I'm seeing most banks lending in the 65-80% range for the 7a program range with an occasional loan for 90%.

Since you have a rehab scenario you are likely going to have to come to the table with a lot more than 10%. My SBA lenders don't mind funding minor improvements, working capital, and/or equipment as part of a loan, but I don't know of any who would embrace major rehab work right now.

If this is a start up business you really need to talk to a SBA lender who has PLP (Preferred Lender Program) status to discuss their appetite for start up businesses and what is a realistic loan if they are lending on them.

From the collateral standpoint, the SBA program is very flexible. While they prefer to use other income producing collateral, they are not opposed to attaching the equity in your home, and will actually allow co-signers who are willing to pledge the needed collateral.

As far as when you would inject the cash, it would be like any normal closing in that you would bring it to the closing table.

I don't mean to be the bearer of bad news so please don't take this post as me trying to rain on your parade. It's important to talk to an actual lender to get an idea of what is possible so you can decide how to proceed based on real numbers.