SBA Loans, 2010
Despite the carnage in 2008, 2009, and 2010 SBA loans still out performed most sectors of the industry, and borrowers in 2009 and beyond are advised to seriously consider SBA loans as one of their primary options. As widely reported, in FYE 2008, SBA-approved loans fell approximately 30% to 78,317 (from 110,275 loans in 2007) and their combined loan value dropped 13% to ~$18B. However most conventional loans did far worse.
(We are still closing SBA loans. If you are looking for finance options, fill out our preapproval form for meaningful answers. Note that our minimum loan size on SBA loans is $400,000.)
As far as the decline in SBA loan fundings, many industry players have been shocked by this outcome. After all, the government set up the program in an effort to help small businesses by providing high-leverage loans that most traditional banks wouldn’t offer. Who would have thought that mortgage-backed securities backed by U.S. government guarantees would have fallen from favor with investors causing banks to curb their SBA lending activities? In addition to supply-side problems, there seems to be a few key issues on the demand side which has slowed closings as well. For one, and this is nothing new, both the SBA 504 and the 7a are relatively expensive in terms of the SBA fees (~3% for both 504 and 7A programs), compared to conventional loans (Note however that these fee where suspended due to the Stimulus Package, which is set to end in November or December of 2009). The 2.75% guarantee fee on the 7a program is hard to swallow.
Surprisingly, some owner-user borrowers who have nowhere else to go for high leverage, low-interest rate financing, will forego the SBA financing route because of the fees, even though in many cases, the fees are rolled into the loan amount and financed. As the realities of the market settle in, will this fee once again seem a reasonable cost for getting a high leverage loan?
SBA Loan
Secondly, the quarterly adjustable rate on the 7a program is scaring some borrowers away as they contemplate where the Prime rate might be going. We’ve had many borrowers talk about the Jimmy Carter days when Prime was 20%. For example, some such borrowers who have hard money loans and would rather pay their double digit rates than refinance into an adjustable rate. The issue for them is that they don’t want to have to refinance now, and then again in a few years and pay all the third party costs over and over again.
This strategy may make sense if investors come back and start buying commercial loans on the secondary market again soon. But is that likely? With all the cheap assets available to investors today, it may take a while for them to see the value in commercial mortgage-backed securities. A more reasonable way to look at the 7a variable rate may be to consider the fact that with the exception of a short period in 2003, the Prime rate has not been this low since the late 1950’s. If you got a 7a loan today when the Prime is 4.00% it would take three years of quarterly 25 bps increases to get the Prime to 7%. At that time, the declining 5/3/1% prepayment penalty would have expired and you can refinance into a better rate if its available. If a better rate is not available you can stay in the 7a loan for up to another 22 years.
SBA Loans
The third issue revolves around what’s contained in the August 2008 SBA standard operating procedure (SOP 50-10(5)). The good news is that the SBA has reduced the size of the SOP. However, they have also reduced the LTV for most special-use properties purchases to 80% from 85%, which is delaying many planned purchases as the borrowers go back to build up their cash. The requirement of gas stations older than five years needing to obtain a Phase II and indemnification agreements inside this SOP has also brought 7a financing of gas station purchases older than five years to a screeching halt as the borrowers look to find other financing alternatives.
Try getting a car wash, restaurant or hotel loan with straight conventional financing at any decent LTV these days. It's not going to happen. With the options for conventional lending for high leverage loan requests being seriously limited, the SBA will continue to be the best choice for many owner-users.
We are still closing SBA Loans! Fill out our preapproval form now as the first step.
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