USDA Rural Business Loan Guarantee vs SBA Loan Guarantee
Colorado Springs, CO · Member since 2017 · 21 posts · 11 votes
Greetings,
Does anyone have experience using the USDA Rural Business and Industry Loan Guarantee, or the SBA Loan Guarantee? Bottom line: trying to figure out which one to use with a wedding planning business's purchase of a rural wedding venue.
Details: fiancee is a wedding planner who has been in business for 3+ years, earning money for her consulting services. With this real estate purchase, she can now charge for her services and for use of the venue, which is huge plus for the business. We have a buy-sell agreement on a venue, and just need to finance it now (our deadline is December 2017, but we want to get it as soon as possible). The venue is in a USDA-deemed "rural" area, and is USDA Rural B&I Loan-eligible. Ideally, we do not want to put any money down, which is why we're looking for USDA or SBA coordination. Does anyone know which route--USDA or SBA--would be optimal for financing?
Any anecdotes (good or bad) or advice would be greatly appreciated!
Honestly, both products could work for this deal and the lender will probably decide which is a better fit for them so I would not worry too much on that. USDA requires a 20% tangible net worth or equity injection into the deal but many of the other aspects are the same as SBA. An SBA lender would most likely want 15-20% down as well for a rural deal. You will need financials that show you can cash flow the project and probably projections if this is an expansion of business along with a business plan. There is no way to do a no money down deal either way. You can do some seller carryback financing for some of the equity but it would have to be on standby for it to count, meaning no payments for the life of the loan.
Contact some local SBA bankers as most do SBA & USDA anyway. They should be able to talk you through it and answer more questions.
@Scott Snow, thank you for your response. We will explore the seller carryback financing with lenders in the coming days. The only part I'm not clear on is the following: "it would have to be on standby for it to count, meaning no payments for the life of the loan." Does that mean the sellers would be completely out their 20% (assuming they left 20% equity in for us to pay back) until the 30-year loan period is up? Thanks again, great response!
Hi Kyle,
The seller carry note has a 2 year required standstill (required per SBA policy) which can then convert to an amortizing term loan once the 2yr period is over. During the 2 year standstill the loan CAN accrue interest at a rate agreed upon with the seller. What the loan converts to after the 2 years and repayment terms is typically up to the borrower and seller.
Lender policy may vary. I have done loans where the a lender really doesn't care what the agreement is i.e. payback over 3 years, 5 years etc. Others tend to like the seller note to be repaid at the same terms of the loan, which I see most often in business acquisition loans (they go up to 10 years terms w/out real estate). Others are fine for example matching the seller loan amortization to the term of the loan, but allowing for a balloon where the loan can essentially be paid in full well before (the lender may even be in a position to refinance it out for you both if the numbers work).
The SBA policy is basically the general guidelines for all lenders to abide by and then each individual lender will layer on their own preferences to meet their credit risk profile. This plays a big part in the type of financing that can be done or industry. For example, some lenders may want to stay far away from the hospitality or restaurant industry, while another lender may love it and have it be a main focus of their business.
Since this is a new purchase (and currently not renting the subject space), you will be required to put down money. SBA and USDA (pretty similar in many aspects) can allow as little as 10% down, however generally speaking I think it was sound advise from Scott that you may need to put down more down, possibly up to 25%, which of course can be a combination of your money and seller financing. Say 10% you and 15% seller. The SBA also has 2 programs for real estate purchase - 7(a) Program and 504. Each has their advantages.
Talk to lenders and they can provide insight to their potential structures (interest rate fixed vs. floating, seller note, down payment etc.). Also be prepared to share the business plan and likely need to do at least 2yrs of projections since this is really a new phase of the business (consulting to now operating a venue).
Hope this helps. I am new to bigger pockets and posting, but been all over these boards for months for my own personal investment knowledge.