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Military Veterans Association of Real Estate Professionals
Loans for

Business Owners

Loans for business owners fall into two classes based on whether the loan is guaranteed by the government. Government-guaranteed loans tend to have better terms because the government is absorbing some of the loan's risk. High leverage (90% to 100%) financing is available for some professional businesses.

Please review the loan program information below and give us a call to discuss which option best meets your needs.

Traditional Loan

Traditional loan programs offer variable and fixed interest rates for both purchase and refinance transactions. Most have prepayment penalties that are a percentage of the remaining loan balance. The percentage typically is constant for or declines during the period when the loan's rate is fixed. Best rates are available for properties in urban areas with no environmental concerns.

♦  Advantages ♦  Available for most property classes
♦  Interest-only programs available
♦  Disadvantages ♦  Penalty for prepayment
♦  Under-$250,000 - higher interest rates
Max LTV ♦  75% to 80% Assumable? ♦  Yes
Rate spread ♦  200 to 300 bp Non-recourse? ♦  No
Closing costs ♦  $3,000 to $6,000 Seller contrib.? ♦  Possible
Min loan amount ♦  $100,000 Prepayment penalty ♦  Declining rate

Second Lien Program

Some lenders allow a borrower to combine a first and second lien to achieve higher leverage. The second lien may be a mezzanine loan offered by the lender or may be carried by the property seller. The business's net income must be sufficient to service the debt for both loans. The maximum LTV for the first lien is typically between 70% and 80%.

♦  Advantages ♦  Higher leverage
♦  Lower coverage may be allowed for combined debt service
♦  Disadvantages ♦  Higher leverage may increase first lien rate
♦  Must negotiate second lien terms with seller
♦  Second lien rates are higher
Max CLTV ♦  85% to 95% Assumable? ♦  Yes
Rate spread ♦  200 to 300 bp Non-recourse? ♦  No
Closing costs ♦  $3,000 to $6,000 Seller contrib.? ♦  Possible
Min loan amount ♦  $100,000 Prepayment penalty ♦  Declining rate

High Leverage Program

If the seller will not carry a second lien, it still is possible to achieve high leverage financing from a high leverage lender. Up to 97% financing is possible on many property types for borrowers with good credit. The business must generate net income sufficient to service the higher debt. The biggest drawback to high leverage loan programs is they carry much higher interest rates than traditional programs.

♦  Advantages ♦  Higher leverage than traditional program
♦  Debt service coverage as low as 0.8
♦  Disadvantages ♦  Higher interest rates than other programs
♦  Achieving debt service coverage more difficult
Max LTV ♦  90% Assumable? ♦  Yes
Rate spread ♦  400 to 600 bp Non-recourse? ♦  No
Closing costs ♦  $2,500 to $5,000 Seller contrib.? ♦  Yes
Min loan amount ♦  $100,000 Prepayment penalty ♦  Declining rate

Stated Income Program

Stated income loans are designed for businesses with inconsistent histories. Traditional lenders typically expect at least 2 years of consistent business income to determine debt service coverage. For new businesses or businesses experiencing change, that may be difficult to achieve. Due to the higher risk, the business owner's personal financial strength is more important than with traditional loan programs. High leverage and seller second liens are permitted.

♦  Advantages ♦  Proof of business income not required
♦  Seller second liens allowed
♦  Personal income documentation not required
♦  Disadvantages ♦  Borrower's credit more important
♦  Higher interest rates than other programs
Max LTV ♦  70% to 85% Assumable? ♦  Yes
Rate spread ♦  450 to 850 bp Non-recourse? ♦  No
Closing costs ♦  $2,500 to $6,000 Seller contrib.? ♦  Yes
Min loan amount ♦  $100,000 Prepayment penalty ♦  Declining rate

SBA 7(a) Program

The 7(a) program offered by the Small Business Administration (SBA) is its most flexible loan program. It helps qualified small businesses that might not able to obtain financing through normal lending channels. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. All 7(a) loans are provided through participating lenders. The SBA guarantees a portion of the loans to reduce the risk for the lenders.

♦  Advantages ♦  Flexible use of loan proceeds
♦  Working capital, construction, equipment purchase okay
♦  Can use combined loan for different purposes
♦  Good program for start-up businesses
♦  Seller second liens may be allowed
♦  Disadvantages ♦  SBA guarantee fee of 2% to 3.75%
♦  Rates typically variable and based on prime rate
♦  $2 million loan limit
Max LTV ♦  85% Assumable? ♦  Yes
Rate spread ♦  350 to 625 bp Non-recourse? ♦  No
Closing costs ♦  2% to 4% Seller contrib.? ♦  Yes
Min loan amount ♦  $100,000 Prepayment penalty ♦  Declining rate
♦  3 years

SBA 504 Program

The 504 program offered by the Small Business Administration (SBA) provides long-term, fixed-rate financing to small businesses to acquire real estate or equipment. Proceeds from 504 loans may be used for fixed asset projects such as: purchasing land and improvements, construction of new facilities, renovation of existing facilities, or purchasing machinery and equipment. The 504 program cannot be used for working capital, inventory, or refinancing debt. Typically, a 504 project includes two loans: a first lien from a traditional lender and a second lien guaranteed by the SBA. The guarantee requires a fee of about 3% of the second lien amount, which may be financed with the loan.

♦  Advantages ♦  Great program for buildings and equipment
♦  New construction and renovation okay
♦  Long-term fixed rates
♦  Higher loan amounts than 7(a) program
♦  Disadvantages ♦  Guarantee fee of 3% of second lien
♦  Cannot be used for working capital or inventory
Max LTV ♦  90% Assumable? ♦  Yes
Rate spread ♦  250 to 350 bp Non-recourse? ♦  No
Closing costs ♦  1.5% to 2% Seller contrib.? ♦  Yes
Min loan amount ♦  $100,000 Prepayment penalty ♦  Fixed rate

Hard Money Loan

Hard money loans are short-term loans designed for business properties with substantial equity and situations requiring quick closings. Hard money lenders are collateral-driven, meaning they are interested only in the quick-sale value of the property. Lenders typically don't even consider the business's financial strength. Often, hard money lenders will accept a recently completed appraisal or some other estimate of property value in order to close the transaction quickly. The tradeoffs are much higher interest rates, higher loan fees, and lower maximum LTV.

♦  Advantages ♦  Quick closings possible
♦  Use of existing appraisal acceptable
♦  Borrower's financial history ignored
♦  Disadvantages ♦  Loans short term, typically 2 years or less
♦  Higher interest rates than other programs
♦  Higher lender fees
♦  Lower maximum LTV
Max LTV ♦  55% to 65% Assumable? ♦  No
Rate spread ♦  650 to 1100 bp Non-recourse? ♦  Possible
Closing costs ♦  2% to 5% Seller contrib.? ♦  Yes
Min loan amount ♦  $300,000 Prepayment penalty ♦  None

Please note that commercial lending is not standardized as it relates to loan terms and program guidelines. Lenders and investors use their own risk profile analysis to set such parameters as loan index, margin, amortization, term, and fees. The numbers in the tables are estimates and depend on the quality of the property and borrower. The rate spreads are given as the difference in basis points (bp) between the loan's interest rate and the rate for the 10-year US Treasury bond. For example, if the rate spread is 200 bp, the loan rate would 2% higher than the US Treasury bond rate. The closing costs do not include our company's origination fee, which typically ranges from 0.5% to 2% of the loan amount.