Best Commercial Loans For Business Owners

Discover the “Forgotten” SBA Program Worthy of another Look

Much has been written on these pages in the past two years about a little understood and even less used commercial real estate loan program called the 504. As our lending firm was the first and is still the only nationwide commercial lender to exclusively focus on only this loan product, I’d like to succinctly put to rest some of the more common misconceptions about this terrific loan product. Rather than waste anymore ink, let’s get right to issue at hand . . .

Who Uses It?

The 504 loan is for commercial property owner-users. It is not an investment real estate loan product per se. Borrowers of 504 loans must occupy at least a simple majority (or no less than 51%) of the commercial property within the next year in order to qualify. Two operating companies can come together to form an Eligible Passive Concern (EPC) (otherwise known as a Real Estate Holding Company, typically as an LLC or LP), however, to take title to the commercial property. In other words, a 504 loan doesn’t have to be just one small business owner purchasing his commercial property. It could be a physician and an accountant each utilizing 3,000 square feet in a 10,000 square feet office building (at 6,000 total square feet in their LLC, they would occupy 60% and be eligible) for example. Additionally, at least 51% of the total ownership of the Operating company(ies) and EPC must be comprised of U.S. citizens or resident legal aliens (those considered to be Legal Permanent Residents) to qualify.

There are no revenue restrictions or ceilings for 504 loans, but there are three financial eligibility standards unique to them: operating company(ies’) tangible business net worth cannot exceed $7 million; operating company(ies’) net income cannot average more than $2.5 million during the previous two calendar years; and the guarantors/principals’ personal, non-retirement, unencumbered liquid assets cannot exceed the proposed project size. These three criteria usually do not disqualify the typical, privately-held small to mid-sized business owner; only the absolute largest ones get tripped-up on these. Last fiscal year (October 1, 2004 to September 30, 2005), nearly 8,000 business owners used 504 loans for over $11 billion in total project costs representing a recent five-year growth rate in the program of 22% year-over-year.

Why Use It?

These loans are structured with a conventional mortgage (or first trust-deed) for 50 percent of the total project costs (inclusive of: land and existing building; hard construction/renovation costs; furniture, fixtures and equipment [FF&E]; soft costs; and closing costs) combined with a government-guaranteed bond for 40 percent. The remaining 10 percent is the borrowers’ equity and is usually a third to half as much as traditional lenders require. This lower equity requirement lowers the risk for small business owners as opposed to lowering a lender’s risk profile with more capital injected into the project like with ordinary commercial lending. It also allows the small business owner to better utilize their hard-earned capital, while still getting all of the wealth-creating benefits commercial property ownership provides.

Unlike most commercial bank deals, these loans are meant to finance total project costs as opposed to a percentage of the appraised value or purchase price, whichever is less. The first mortgage (or trust-deed) is typically a fully amortizing, 25-year term at market rates, while the second mortgage (or trust-deed) is a 20-year term, but with the interest rate fixed for the entire time at below-market rates. The second mortgage (trust-deed) on 504 loans is guaranteed by the U.S. Small Business Administration (SBA) and is, contrary to popular belief about SBA loan programs, the cheapest money available for typical small business owners. For most of the past two years, the SBA bond rate hovered near six percent fixed for 20 years, which is an incredible deal for any small to mid-sized business owner and very tough to beat. Not only do these loans provide better cash flow for borrowers (by borrowing at better rates and terms), but they also provide the highest cash-on-cash return available in the commercial-mortgage industry which is a financial metric used by most successful real estate investors. Furthermore, these loans are assumable should borrowers decide to sell their property in the future, but a better strategy for most small business owners would be to sell their operating company while keeping their EPC and cashing rent checks long into their retirement.

Why You May Not Know Much about These Loans?

Many bankers and brokers don’t like to offer 504’s because they fundamentally are smaller loan amounts for the bank (typically only 50% first mortgages or trust-deeds versus the common 80%), which means a banker has to work that much harder to bring in more assets and the smaller loan amounts also hit the typical commercial loan officer right in the pocketbook. They would rather discuss the SBA’s more notorious 7(a) loan program, which has a well-established, if not egregiously well-paying secondary market (due to Prime-based, floating rate pricing) already in place, when the issue of low down-payment commercial loans comes up. When you couple those two reasons with the fact that these 504 loans take more effort and skill only on the part of the lender, it’s no wonder this loan product has only recently started to catch fire in the marketplace.

So what are Some Common Questions about These Loans?

Isn’t There Tons of Paperwork Involved?

This was certainly the case years ago, but it is no more. With the advent of more and more specialty lenders and the recent focus on streamlining the SBA application process, 504 loans are no more involved than most ordinary commercial loans. While the documentation is specific and detailed, most small business owners are ably organized and prepared when the alternative is to pay two to three points higher in interest rates with no documentation or stated income commercial loans.

Aren’t There Extra Fees Involved?

When all closing costs are considered, 504 loans usually average about 25 to 50 basis points more in total loan fees on an average sized transaction. With stronger borrowers (i.e. better debt service coverage ratios [DSCR], higher personal liquidity, and/or better personal credit scores), these fees can usually be negotiated lower. Most small business owners utilizing 504 loans are willing to pay slightly higher fees, however, in order to receive longer-term, below-market fixed interest rates on nearly half of their deal, while receiving the highest cash-on-cash return from their property. This is exactly the reason my business partner and I chose a 504 loan when plenty of alternatives were available to us. That’s right – we actually have a 504 loan and have been in the shoes of 504 loan borrowers, so I have first-hand experience of using the loan product that we offer.

Don’t These Loans Take 3 or 4 Months to Close?

This is another old relic of the past regarding these SBA loans. Our quickest 504 loan to date took only 35 days from the first phone call to the closing table, and the commercial appraiser ate-up most of those days while we waited. We’ve done countless others in much less than the typical 60 day commercial real estate contract. If a lender claims they need nearly four months to fund a 504 loan, then perhaps you should look elsewhere. Twenty-four to forty-eight hour pre-approvals and four or five-day commitments are becoming the norm with most specialized SBA lenders.

Aren’t These Loans for Start-ups or Low DSCR Borrowers?

Plenty of 504 loans are approved with start-up borrowers and/or borrowers that don’t have DSCR’s greater than 1.25 times. While it is true that most 504 loans are for more credit-worthy (usually bankable) borrowers, this is not a necessary condition. Frequently, 504 loan borrowers with lots of experience in a given industry, but no actual ownership experience, will have an easier time securing a 504 loan than a conventional bank loan. Projections-based deals and franchised deals are often great candidates for 504 loans when the project involves commercial property. There are other SBA loan programs that may be a better fit for pure start-ups, as 504 loans do not allow for the financing of working capital, but those other SBA loans can often be used in conjunction with SBA 504 loans.

Doesn’t a Borrower have to Pledge their House as Collateral?

Only some lenders require this for 504 loans, and it is increasingly rare. Other SBA loans, on the other hand, must be “fully collateralized” in order to maintain their government-guarantee which is where this generalization comes from. Most 504 loans only secure the commercial property and/or equipment that are financed as part of the 504 loan project.

What if a Borrower has a “Checkered Past”?

Misdemeanors and/or felonies are not in and of themselves, reasons to disqualify someone from getting a 504 loan. There is an added process that often lengthens the time to closing, but the SBA usually approves borrowers with misdemeanors or borrowers with felonies that occurred in the distant past. Defaulting on previous government-guaranteed financing, however, will preclude someone from securing a 504 loan or any other SBA loan. Personal bankruptcies that occurred more than seven years ago usually will not prevent a 504 loan approval, assuming the present-day underwriting variables look promising, but more current bankruptcies are examined subjectively and frequently won’t be approved.

How do you determine who to Call for a 504 Loan?

If you visit a lender’s website to do some due diligence on them, make sure they at least list and/or mention 504 loans, as a means by which you might gauge their competency with these loans. Any lender can say they do 504 loans, but it is far better to work with those that can demonstrate their past experiences with the product, as well as detail their commitment to it on a go-forward basis. Like most things delivered better by specialists, it isn’t usually a question of if a regular lender can provide a 504 loan; it is a question of how well they can provide it. Choose wisely.

Need a Loan For Business? Consider a Secured Business Loan

In the world of business especially business financing, there is to me no end of options for the small-business owners to look at when it comes to financing expansion and as such getting some type of business loan. In short, there seems to be so much choice that it can be quite overwhelming. However, if you’re looking at a loan to expand your business and you want to make sure that it is the right loan for you you may want to consider a secured business loan. This type of loan is several different advantages for both the lender and borrower is something that you need to take a look at before you make your final decision.

This type has the advantage of potentially garnering the poor will lower interest rates simply because it is secured and the reason for that is in comparison with an unsecured business loan, the risk is split between the poor and the lender. Typically, you must put up some form of asset as collateral as well. This of course has the advantage of making the Boro rethink exactly how much of the loan he needs as well as whether or not he should get it in the first place

That being said, secured business loan also has the advantage of being a faster loan to get. The reason for this of course is that with the borrower putting the collateral, the lender has every reason to speed the loan through a little bit faster than they would if it was an unsecured loan for which the lender takes most of the risk. And this is also good in another respect in that it really does make the borrower consider all of his or her options rather than just rushing in to get a loan that he thinks he needs

Bad Credit Business Loans – For Business Financial Needs

Bad credit business loans offer financial assistance to those business entrepreneurs who are seeking financial help for their business despite having poor credit. Bad credit owners or those willing to start their own business with poor credit like arrears, defaults, late payments, bankruptcy, missed payments, IVA and CCJs can easily grab this loan assistance for meeting their financial needs. For bad credit business aspirants it’s a good opportunity to start their business and resolve their poor credit as well.

These loans can be acquired in secured and unsecured form. Secured bad credit business loans can be procured by pledging your valuable asset such as property, car, stock or other such valuable asset as security against the loan amount. You can raise a higher loan amount £50000-£100000. The repayment term varies from 5-25 years.

Unsecured bad credit business loans can be procured without putting your asset at risk. Yes! These are free from collateral requirement and you can borrow anything £25000-£50000 for a short term of 1-10 years.

The funds are provided at relatively higher rates of interest as the bad credit records of borrowers pose an increased risk on lenders of non repayment. But lenders compensate the risk by charging slightly higher. But you can scout around and find a lower rate deal also.

To get the funds approved easily and to apply in a hassle free manner, you can apply online. The online application is less time consuming and you can scout around well to fetch lower rate deal with lucrative terms easily.

Bad credit business loans can be procured for either starting up a new business venture or for meeting the requirements of your existing business. You can buy asset, purchase tool or equipments, expand your business, construct office, consolidate your debts or pay wages etc. Such financial activities can be easily carried out.

By repaying your loan installments on time and by consolidating your existing debts you can easily repair your bad credit records. But remember not to follow the old pattern of defaults and non payments!

What Is a Working Capital Loan for Business?

Some organizations apply for loans to expand the scale of their operations while some businesses apply for loans in order to facilitate smooth running of the organization. This simply implies that these loans are used to cover the day to day activities which is also known as a working capital loan.

Working Capital Loan (WCL)

As each and every business organization incurs expenses in carrying out its day to day operations activities, it is a loan used to cover this aspect of the business. A working capital loan cannot and should not be used for investment purposes such as purchasing fixed assets, investing in marketable securities or any similar venture whose main objective is to advance the overall investment portfolio of the business organization in question based on MAS regulations and guidelines.

Aspects of a WCL

Insufficient Revenue

The main rationale behind the loan is informed by the fact that in many cases, business organizations might not be in a position to generate sufficient revenues to cater for their operational costs on certain months. For instance, company X is able to collect monthly revenue of $15000 but at the same time, its monthly operational expenses is $20000. In such a scenario, company X cannot cater for the cost of its operational expenses solely from its monthly revenue. This clearly illustrates the importance of a WCL in facilitating the smooth running of the business organization.

Cover Fixed Costs

There are several aspects that are deemed operational with respect to the overall functioning of the organization, and as such, can be covered by a working capital loan. These aspects include accounts payable and wages among others. Payment of employee wages especially is an important aspect since it determines the overall motivational level of the employees. Some companies could resort to cutting the salaries of its employees when they don’t have enough cash flow to cover worker’s wages. That could be very detrimental to the performance of the firm as employee motivation would fall, and good people might even quit the company, which are hard to replace. It is in such situations that companies are advised to take a working capital loan.

Other Expenses

Advertising is a key marketing strategy that will determine the overall market performance of the business organization. By funding such important aspects of the business organization, a working capital loan plays a vital role in enhancing the overall performance, continuity and sustainability of the business organization.

Asset Based Loans for Businesses

Asset Based Lending can come from a variety of sources. There are commercial sources which have entire divisions devoted to just asset based lending. You may find that you will want to use more than one source for your asset financing needs.

One of the most popular types of asset financing is in the form of flooring; which is lending based against the inventory you purchase. Car dealerships have used this type of financing for decades. With this particular type of asset based lending, there are two distinct types of loans. One is based strictly against each individual piece of inventory – such as automobiles, which is easily identified by the VIN (Vehicle Identification Number) that is carried by each vehicle. The dealership, for example, has so many days after the car is sold to pay the finance company. The other type of flooring is done strictly by invoice. In this scenario, the flooring company acts as a middle man for you. You place your order with your supplier and the flooring company then prepays the invoice, taking all the discounts that are available. You then have a set number of days in which to pay the full invoice price to the flooring company (or bank).

Banks also are involved in asset based lending. This type of business financing is based against assets: accounts receivables, buildings, inventory, and vehicles or other equipment. Do not expect to get 100% financing and remember that banks and financing companies are for-profit business, so you will be paying them interest.

You should shop for the most competitive interest rates and favorable terms from your asset based lending source. Make sure that the way the loans are structured is something that you can live with. Look at the worst case situation. What happens if everything goes into the waste basket? Can you live with the terms then? Never forget that your financing source will also be looking at the worst case scenario and will try to tie up as many of your assets (both business and personal) as possible.

Even when you consider the possible down-side, this is one of the best ways to finance your company’s needs. Asset based lending or asset financing is very straight forward and is easily understood. Be sure to use your accounting professional to help evaluate this added cost of doing business, as there is a cost. Many times, it is the only way to soundly grow your company without stretching your working capital beyond its bounds.

Take care with your needs and talk to the banking and flooring companies so that you have a really good idea of what their expectations of your company will be. By working your plan, you should be successful with prudent use of your working capital and the applied business practices of money management.

Jamie Doyle is an online information publisher, researcher and webmaster. His interest are varied widely, from business management and international finance to remodeling and grand children.