Your institution may participate in the Small Business Administration’s express or 7a guaranteed loan programs or have worked with a Certified Development Corporation on an SBA 504 loan. Your group may have also worked with the United States Department of Agriculture’s Business and Industry (B&I) loan program. But what circumstances make it better to look at the SBA or the B&I guarantee?
The first item to consider is location. SBA loans can be done nationwide, while B&I loans must be in cities and towns with a population of less than 50,000. The intent of the B&I program is to assist credit-worthy rural businesses to obtain needed credit for qualified business purposes. They focus on creating and saving jobs in rural America.
The next item is what will the loan proceeds be used for? If the project is at least 51% owner occupied real estate, then the 7a, 504, or B&I program is usable. B&I can be used for rental properties in Opportunity Zones, if these are creating jobs. Large equipment loans can be guaranteed by the 7a or B&I program. If you have a borrower needing working capital, company buy-outs, or loans without substantial real estate or large machinery collateral, then the 7a or express program is for you.
Loan amount is a consideration. Most 7a loans have a max of around $5 million. 504 loans have a structure that may go up to $10 million between the 504 and underlying first loan. B&I guaranteed loans can go up to $25 million and may be increased above this in some cases.
Amortization is the next factor. 504 loans can have up to a 25-year amortization and the underlying first mortgage has to have a term of at least 10 years. 7a loans have a blended amortization depending upon the purpose of the funds with real estate having a term of 25-30 years, equipment is usually at 7 years, and working capital 5 years. B&I loans can go up to 15 years on equipment and 30 years on real estate. The longer amortization may help free up cash flow.
Balloons are another factor. B&I guaranteed loans cannot have a balloon feature on them. SBA 7a loan are also full term with no balloon. The first mortgage in front of an SBA 504 loan will usually balloon in 10 years and must be refinanced.
Prepayment considerations are important. SBA 7a loans will have a prepayment in the first three years. 504 loans have a prepayment in the first 10 years. B&I loans have no prepayment on them.
The borrowing entity is also an issue. SBA must have a for-profit operating company as a borrower. B&I loan can have individual investors, non-profits, cooperatives, Federally-recognized tribes, and public bodies as eligible borrowing entities.
Interest rates on the SBA guaranteed loans are highly regulated by the SBA. 504 loan rates are set by the bond debenture market. The B&I lender has more power to negotiate a rate acceptable to both borrower and lender, assuming the rate is not uncommon with other credits the lender has.
How much your institution wants to guarantee is important. B&I loans can have a guarantee from 60-90%. SBA express loans have a 50% guarantee. Export express loans an international trade loans may go up to 90% as a guarantee. 7a loans will range from 75-85%. The SBA 504 loan is not a guarantee but is a junior lien behind your first mortgage.
Each program does have its own quirks. The SBA eligibility has a net worth threshold of the sponsors on the credit, which looks at affiliated owned entities. A borrower who grows to a certain size may be too large for the Small Business Administration standards.
The B&I program has a stringent tangible debt to net worth ratio requirement. Some items on the company balance sheet may not be considered as assets or tangible equity which can push the ratio higher. B&I also has a multi-agency checklist that can become squirrely if you have a project in a national historic district, wetland, or reservation.
Either of these programs are wonderful ways to help mitigate the lender’s risk in the project and may help you win deals that are outside the comfort zone you have for these credits. If you have questions on these, contact us. We have worked with lenders on both the SBA and the USDA B&I program underwriting, syndication, and ongoing file management.