SBA loans

7 Replies

Hello, 

Just started seriously looking into financing for my new parent entity and was wondering if anyone had input on the SBA loans and other services offered by sba.gov 

I opened a bank account for my entity at a national bank, but was a bit disappointed to hear that they don't consider doing business loans until the business has existed for two years. I've rented a SFR for 8 years, but alas, it was just done through my own personal finances, bank accounts, and tax returns.

Thanks for your input!

Spent many years volunteering for SCORE and don't have a high opinion of SBA backed loans.

1. Few banks offer them as the paperwork is daunting - they advertise quick loans but they are usually pretty small dollar wise and even they usually take longer than advertised. You are working with the govt.

2. They aren't cheap. Just a couple years loans were running double the rate of mortgages.

Given the failure rate of startup businesses ( estimates range from 65 to 80%) banks shy away from new businesses and need a track record before doing business. It becomes a catch 22.

Friends, family, HELOCs, credit cards, angel investors and crowdfunding are options but usually in combination.

Thanks for the reply! That's a good point about the amount of paperwork. Everything involving the government is slow and complicated, for sure. It is such a catch 22! Must have money to start, but you must have a history to get money. Does not compute. 

I have been using my HELOC, but then that entangles my own finances into the business' somewhat. Keeping good records of every expense I incur and repaying myself out of the earnings should take care of that issue though.

Even though the SBA loans are more complex, are they still basically the best loan options for a brand new business? I can't recall the section off the top of my head, but there was also a couple of types of FHA loans that seemed to be useful to rental property owners.

There are a lot of misconceptions about sba loans and their programs. The sba programs are created by the government but the the banks are the one responsible for doing the loans and following the hundreds of pages of rules since it is a tax payer back program. The bank still gets to choose when they do the loans or not so one bank may do one type of sba loan for a certain business but not the other. It is not fairly typical to make sba loans to residential real estate investors. Sba loans are for business owners looking to buy real estate for their business to occupy, equipment to buy, and other uses related to a more retail like business. There are many rules related to lending into companies that are making passive income. You can't really get an sba loan for real estate investing purposes as the end product is a passive business practice which SBA doesn't allow just like you can't buy a building with sba without occupying 51% of it.

You can try to get a sba line of credit but without showing you are running an active business vs some rentals you probably won't be approved and especially not at any large bank. Stick to small community banks or credit unions and work on a relationship with them. Put your accounts there and run your money through their bank. Get to know the loan officer. Just like any business relationship you got to put in the time and show them who you are and what you are doing. Pick a lender who lends in real investing and not so much in the sba world would be my advice.

In agreement with Scott.  I only know the rules at a high level and have reviewed some portfolios of SBA loans backed by real estate.  The bank underwrites the loan and handles the paperwork. The government provides a first loss guarantee so the bank can offload a fair amount of the risk.

In real estate, the common thread is that the building is owner occupied for an operating business (restaurant, store, medical office, etc).  It is not used for third party rentals or fix and flips.

Ah that is kind of the sense I was getting about these loans. That's too bad, but I can understand that it is a higher risk type of loan in that respect. Hmm well thank you for the input on this! Very helpful!

Hi @Scott Snow

That's all great information you provided.

I was wondering I'm looking to buy an assisted living facility which is already up and running and making great returns, the owners are selling the property for $280k and the business for $110k. Do you think I'll be able to finance both as part of an SBA loan? I'm trying to figure out how I can finance both parts?

Also is it possible with an SBA loan that I could cross collateralize with some of my other properties and not have to put a down payment? I was thinking about selling one of them to fund the purchase, but if I could do that instead, i could keep that property, even though it would be at risk if something was to happen to the business.

I might be ill informed on this subject so I appolgize if this is the case.

Thanks

Barri

@Barri Griffiths Hi, You can finance both with SBA. Run a comparison of the land rent annual cost to the Mortgage cost plus any additional expenses they will incur. If the mortgage is equal or less (and they are already profitable then it becomes pretty simple. The business is financially better off owning the land it sits on. SBA loans require 10% down. pm me if you'd like to talk more. Best,

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