The Best Uses of the SBA Loan Types
Business owners have a time-sensitive incentive to secure long-term financing because interest rates are near an all-time low and it is predicted that rates will slowly raise over time. The Small Business Administration (SBA), a division of the Federal Government, guarantees a percentage of all SBA loans to reduce the lender’s risk to the portion of the SBA loan that the SBA does not guarantee. The SBA assumes between 75% up to 90% of the SBA loan which varies depending upon the SBA loan type. Since most banks are risk adverse in the current business environment, this characteristic of SBA loans is extremely important. Since SBA loans spread the loan risk between the lender and the SBA, the chances of receiving a loan approval is greatly improved when compared to a traditional bank loan.
The 4 common uses of the SBA loan programs identified below vary significantly based upon the specific circumstances of the business owner(s).
- Refinance Existing Business Debt
Many existing club owners have equipment leases which are being repaid over terms ranging from 3 – 5 years. SBA 7(a) loans that do not involve the purchase or refinancing of real estate offer repayment terms ranging from 7 to 10 years. Interest rates start by using the prime lending rate as published in the Wall Street Journal (currently 3.5%) as a base line rate. The lender then assigns a risk premium to be charged over the prime rate which varies based upon the strength of the borrower(s). A typical risk premium is 2.75%, consequently a 6.25% interest rate is a common rate; which is near a historic low! Existing debt can be refinanced as long as the new loan’s monthly payment is at least 10% less than the monthly payment(s) of the debt being refinanced. Very often the monthly payment savings significantly improves the business’s cash flow once the refinancing is completed. The reduced monthly payment will improve cash flow allows the club owner to invest in their business, maintain the equipment, hire staff, increase marketing and provide a buffer if a new competitor opens in their immediate area.
2. Purchase or Refinancing a Commercial Building
Club owners who own their real estate often have mortgages originated by their local bank which often have balloon payments at the end of a 7-10-year term. When a SBA 504 and 7(a) loan is used to finance or refinance real estate, the repayment term is fully amortizing over a 20-25-year term. Unlike many commercial real estate loans, SBA loans are fully amortized and do not have balloon payments. One main benefit of using SBA to finance a project is leverage. Traditional commercial mortgage underwriting will provide for 75-80% financing assuming the borrower is deemed ‘bankable’. Under the SBA programs, a borrower can finance 90% of the entire project. This reduced down payment requirement often can make a transaction possible for the borrower.
If the club owner does not own their real estate and is leasing space, using an SBA loan to purchase a location provides stability and future equity to the business owner. The business must occupy 51% of the space so the option of purchasing a larger building than the club needs is an option. This expands the real estate options available and offers an opportunity for the club owner to rent out the existing space to a symbiotic business such as a nursery or a health food store.
3. Access Working Capital for your New or Existing Club
Most small businesses need working capital, however many owners are unable to obtain this type of financing because their business is too small or it lacks the necessary collateral. The SBA Express Loan Program is a relatively new program designed so that the collateral for the loan is the business assets. The intended use of funds is nearly unlimited; however, the business must be open with a certificate of occupancy to insure that the funds are not used for construction. The SBA Express loan program was designed to provide working capital to operating businesses especially in the critical early years. The SBA announced a temporary waiver of their guarantee fee on all SBA loans $150,000 and below to assist small businesses access capital to help sustain and grow their business.
Since this loan program is designed to provide working capital, it is symbiotic with an equipment lease so new business owners can access capital to finance their fitness and non-fitness equipment using an equipment lease. In addition, the new club owner can assess working capital once open using the SBA Express loan!
4. Finance a New Business Venture or A Major Expansion
The SBA 7(a) program is designed to provide financing for 70-85% of a major business venture. The typical loan amount will be no less than $350K and as the table below shows, can range up to $5M. First, the total cost of the project from inception to the point when the business is profitable is quantified. All costs including, but not limited to equipment, lease deposits, buildout, working capital, franchise fees and contingency allowance must be included. The borrower(s) are responsible to contribute the 15-30% portion of the project cost to the business from funds that were NOT borrowed such as a home equity loan. This loan type requires additional collateral up to the loan amount provided by the borrower(s). The collateral can include the business assets such as the fitness equipment, personal real estate and/or marketable securities. This SBA loan is secured both by the additional collateral and by the SBA guarantee which enhances the chance that the loan application will be approved even in the case that the business is a start-up with no previous track record.
SBA LOAN TYPES
The variety of SBA loan programs is an important element explaining the success of the SBA to meet the various needs of business owners. The following graph provides an overview of the main SBA programs available to all fitness centers located in the United States.
|SBA 504 Loan Program||SBA 7(a) Business Loan Program||SBA Express Loan Program|
|Use of Funds:||To purchase or construct owner-user commercial real estate||Business acquisition, startup, equipment, debt refinance, working capital, inventory, tenant improvement, partner buyout||Startup, equipment, debt refinance, working capital, inventory|
|Loan Types:||Term loans||Term loans||Term loans|
|Loan Amount:||Up to $10 million||Up to $5 million||$20,000 to $150,000|
|Interest Rate:||Adjustable and fixed rates available||Adjustable based on WSJ Prime Rate||Adjustable based on WSJ Prime Rate|
|Term:||Real Estate: *Lender Loan-Typically 25 years *CDC Loan-Typically 20 years Equipment:10 years||10 years – Debt Refinance, Business acquisition, equipment, tenant improvement; 7 years -Working capital & inventory
25 years – Real Estate
|Amortization:||*Typically 25 years on 1st position *20 years on the long-term(CDC)portion||Fully amortized, no balloon payments||Fully amortized, no balloon payments|
|Prepayment Penalty:||Prepayment applies||Prepayment applies||None|
|Collateral:||*SBA Bank Loan – 1st mortgage on property being refinanced *CDC Loan – 2nd mortgage on business real estate||Personal real estate and/or marketable securities||All business assets|
|LTV/Advance Rates:||LTV: Up to 90%||Advance Rate: 75% – Startup 85% – Business acquisition 90% – Equipment; 100% – Debt refinance, inventory, working capital, partner buyout||Advance Rate: 75% – Business acquisition, start-up, partner buyout; 90% – Equipment; 100% – Debt refinance, working capital inventory|
SBA loans have been a consistent source of financing for the fitness industry even throughout our recent financial crisis. Since 1981, the SBA reports the “Fitness and Recreation Sports Centers” category as funding $44,267,100 in loan volume. The table below reports the 2014 SBA total loan volume over $16M for the fitness industry; a significant increase over the previous years! “The SBA’s loan guaranty program continues to be an important source of funding for the fitness industry…. As the economy continues to rebound and people focus more on their health and well-being, we expect the trend to progress upward,” said Francisco “Pancho” A. Marrero, SBA South Florida District Director.
|YEAR||$ AMOUNT||NUMBER LOANS|
Since SBA loans have a proven track record for providing funding to the fitness industry, it is only logical that SBA loans will continue to be a key source of funding to the fitness industry for years to come.