SBA 7a vs Conventional commercial Loan ?
Member since 2022 · 1 post · 1 vote
Hello everyone. New to investment and the BP community!
Im in the process of buying a commercial office condo for my business.
I have been offered 100% financing thru sba 7a loan ( 25 yrs) or conventional loan (20 yrs )with 20% and both at 5.25% interest
SBA will place a lean on my personal house as collateral until a certain amount of the loan has been met
My question as a newbie is ... Should i go for SBA 7a loan and have the lean on my house and get 100% financing and have the liquidity available for other deals as they arise or should i take the conventional loan a forgo a lean on my property. What would be the best investment route in your opinion?
Jossue, you and we don't have enough info to make a decision; and you have some major downstream issues possibly.
More info:
1. The SBA Loan is 50% with the SBA and 50% with a local bank, if 100% financed. The SBA portion is for the 25 year term, the local bank is not. Find out if they are on a 5 or 10 year commitment, with balloon refinance. The reason this is an issue, is your 5.25% will go up at the end of the commitment term. Are you okay with that.
2. How much is the 20% down on the Conventional 20 year amortization. Is it a number you can live with? Also, the Conventional although a 20 year amort is probably a 5 year balloon refinance. Can you handle refinancing at 9% or so, 5 years from now?
3. SBA loans. Should you build up Appraised value in your Commercial Office Condo and want to refinance, it is very hard to do through SBA, if not impossible. Thus you can't use that as collateral for another deal, unless it is through SBA.
4. SBA only does certain types of deals. If your next deal doesn't fit their parameters any equity you have in your Commercial Office Condo will not be usable. If you had the Conventional loan it is usable.
5. Do you have equity in your house. Don't tie it up with the SBA then. Unless any future deal you do, fits with the SBA model, you won't be able to use your house equity. Also don't plan on changing houses until your committment or equity position is fulfilled.
6. What happens if your Housing situation changes? What is the impact on the SBA loan?
Jossue, the key point, is understand the good and bad of either approach.
SBA- Good- Longer term, lower interest rate, lower downpayment. Bad- inflexible to use appraised value in either your home or the Office condo, unless on another SBA deal, Inflexible on another type of deal unless it fits the SBA parameters. I would really hate to tie my house to this loan, especially in this Economic environment.
Conventional- Good- Flexibility in using assets as collateral. Your house is not involved. Bad- higher interest rate, higher Downpayment.
It depends on your personal preferences, but assuming you are okay with both options, objectively borrowing money at 5.25% is a win. Take the 100% financing option as long as you can reinvest it.
As long as you can put the money to work elsewhere, I would personally utilize the SBA 7a loan. Since it is government backed, the lenders typically have the ability to take on additional risk, which in this case is 100% financing.
Jossue, you and we don't have enough info to make a decision; and you have some major downstream issues possibly.
More info:
1. The SBA Loan is 50% with the SBA and 50% with a local bank, if 100% financed. The SBA portion is for the 25 year term, the local bank is not. Find out if they are on a 5 or 10 year commitment, with balloon refinance. The reason this is an issue, is your 5.25% will go up at the end of the commitment term. Are you okay with that.
2. How much is the 20% down on the Conventional 20 year amortization. Is it a number you can live with? Also, the Conventional although a 20 year amort is probably a 5 year balloon refinance. Can you handle refinancing at 9% or so, 5 years from now?
3. SBA loans. Should you build up Appraised value in your Commercial Office Condo and want to refinance, it is very hard to do through SBA, if not impossible. Thus you can't use that as collateral for another deal, unless it is through SBA.
4. SBA only does certain types of deals. If your next deal doesn't fit their parameters any equity you have in your Commercial Office Condo will not be usable. If you had the Conventional loan it is usable.
5. Do you have equity in your house. Don't tie it up with the SBA then. Unless any future deal you do, fits with the SBA model, you won't be able to use your house equity. Also don't plan on changing houses until your committment or equity position is fulfilled.
6. What happens if your Housing situation changes? What is the impact on the SBA loan?
Jossue, the key point, is understand the good and bad of either approach.
SBA- Good- Longer term, lower interest rate, lower downpayment. Bad- inflexible to use appraised value in either your home or the Office condo, unless on another SBA deal, Inflexible on another type of deal unless it fits the SBA parameters. I would really hate to tie my house to this loan, especially in this Economic environment.
Conventional- Good- Flexibility in using assets as collateral. Your house is not involved. Bad- higher interest rate, higher Downpayment.
To clarify a few things: the SBA 7a loan you describe does not involve a 50% conventional and 50% SBA loan. That loan structure does not exist in the SBA world. An SBA 7a loan can go up to 100% under the SBA 7a guaranteed program but the SBA does require personal assets (if available) for additional collateral at that high of a LTV.
You consider that whether you pledge personal assets or not, you will be required to provide a personal guarantee. If you can cash flow at higher leverage then the SBA 7a program may be a great option.
Agree with Dan.
An SBA 504 loan (also used for owner-user commercial real estate) does have a unique structure but it's not 50/50.
50% conventional lender
40% SBA
10% borrower down payment (minimum)
Split structure lets banks take on less risk and still provide a low down payment for the small business owner.