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 rise 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 obligation, 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 significantly improved when compared to a traditional bank loan.
Four Common Uses of SBA Loan Programs
The four common uses of the SBA loan programs identified below vary significantly based upon the specific circumstances of the business owner(s):
1. 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 – 10 years. Interest rates start by using the prime lending rate as published in the Wall Street Journal (currently 3.5%) as a baseline 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 an 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’ cash flow once the refinancing is completed. The reduced monthly payment will improve cash flow, and it 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.
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