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2008 has been a very tricky year for all involved in the commercial mortgage business and SBA commercial loans are no exception, to the surprise of many. Numbers are down across the board and some estimates are coming in that the SBA 7a program (the most popular) will have closed roughly half of what they did in 2007, in terms of loan volume. Number of closed loans is also way down.

Many industry players have been really shocked by this outcome. After all, the government set the program up in an effort to help stimulate the economy and many players where betting that the SBA loans would be relatively stable and undamaged.

There’s seems to be a couple of key issues here that have slowed closings besides the obvious liquidity problems. For one and this is no surprise, both the SBA 504 and the 7a are expensive compared to conventional loans. From the broker’s perspective, selling the 2.75% SBA guarantee fee on the 7a program is no easy task. And it doesn’t matter to a lot of borrowers, especially those that are use to more competitive conventional loans, that the fee is rolled into the loan amount. Or that this might be their only real option.

Also, the quarterly adjustable rate is scaring some borrowers away as they contemplate what and where Prime might be going. We’ve had many borrowers talk about the Jimmy Carter days when Prime was in the 20%. So many borrowers are passing and just sitting on the sidelines waiting for conventional to come back. For example, we have several borrowers waiting that have hard money loans and would rather pay their double digit rates than refinance into an adjustable rate. The issue is that they don’t want to have to refinance again in a few years and pay for the third party costs again. Of course this assumes that conventional loans will be back.

Another issue has been that the SBA recently rewrote their 800 page manual and made it a more manageable 200 pages. A great effort for more simplicity and efficiencies have unfortunately caused a lot of confusion as many underwriters have been left with unanswered questions about what the new guidelines are, exactly. This confusion and doubt has been an incentive for some banks to pass on the SBA programs. Unfortunately the timing on this couldn’t have been worse.

What are the liquidity issues? As many readers are aware most banks that fund SBA loans do so with the intent of selling the debt off onto the commercial secondary market. Now that this market is so beat up and that there are few buyers, banks have to hold onto the debt on their balance sheet. For some banks this goes against their business model and for other it’s not even an option as they have their own liquidity issues. Many banks can’t or don’t want to be portfolio lenders.

However, despite the problems it is worth noting that the SBA loans are still standing and there are banks that are still closing loans with the SBA guarantees. While conventional is basically out completely for the time being. For example, try getting a car wash loan done right now without the SBA guarantee. Or a hotel loan or a restaurant loan. There are very few conventional loans out there that will even discuss a special purpose property with you if it’s not going through a government sponsored program.

Author: Jeff Rauth
Article Source: EzineArticles.com
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Owners looking for a restaurant loan have limited options and the credit crisis is giving a “beating” on all special purpose properties; such as restaurants. Although borrowers still have three main sources for financing, including conventional bank loans, CMBS lenders and SBA programs, borrowers are encourage to take a hard look at the SBA programs first due to their reliability of closing and strong benefits.

SBA 7a loan has many benefits on both purchase AND refinances, despite the notorious reputation it has with some borrowers. Most of these earlier issues have been ironed out in the last 5 years though borrowers should be careful who they work with, as bank that are inexperienced with the SBA can quickly complicate the process.

Examples of the benefits include 85% financing and low rates at prime + 1-2% for most borrowers. Right now Prime is at 5%. An effective rate of 6% from a historical stand point on a special use property such as a restaurant is exceptional. In addition, most 7a loans are amortized over 25 years helping the borrower spread out their loan and thereby increasing cash flow as compared to most traditional bank loans of 15 or 20 year amortizations. Working lines of credit, equipment, and construction/renovation loans can easily be tied into the loan.

One of the other huge benefits is the flexibility this program has for cash flow analysis aka debt coverage ratios. Most sources want to see a 1.3 on this type of building while the SBA 7a loan only needs a 1.1. In other words, the business needs to show that for every $1. of proposed mortgage payments that the restaurant has $1.30 of net income to cover the proposed loan. So after all expenses have been paid including the mortgage the restaurant should have $.30 left over. With the 7a it would only have to be $.10 left over which can be a big difference for most business that have tight cash flow.

Further, the borrower is allowed to use future business projections as well, to supplement any existing short falls in cash flow. This is not possible with 99% of the other options out there as they will only look at historical statements like your tax returns, balance sheet or profit and loss statements.

The negative with the 7a loan is that the rate typically floats and the SBA has a guarantee fee of 2.75% of 75% of the loan balance. However this is not always the case. For example, we have a source that offers this as a 5 year fixed, 25 year amortization loan. And there are banks out there that will absorb or pay for the guarantee fee themselves.

The short of it is if you’re looking for a restaurant loan keep you eye on the 7a loan.

Author: Jeff Rauth
Article Source: EzineArticles.com
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