What to Look out for When Getting Financing from Your Bank

Every day, business owners wake up at 4:00 or 5:00 a.m. They have a lease payment due on their commercial facility later that day and they finally have that lightbulb moment and say maybe I should convert this lease payment into a mortgage payment. Maybe they make a phone call later that morning to their bank where they have their operating accounts and they go in and meet their loan officer at the bank and say, “I’m considering exercising my lease to purchase option on my property or there’s an ideal property down the street that I want to buy and move my operations into.” Oftentimes that conventional bank loan officer will tell them, “OK, great,” if they’re financing commercial real estate, which not every bank does these days. Pre-recession, everybody did. Post-recession, it’s not as common as it used to be. But, assuming they do, they say, “Sure, we’d love to do this with our conventional commercial loans. You’ll need to bring 20-30 percent as your down payment and we’ll probably do a 15-20-year amortization, how’s that sound?” Well, the business owner may sort of wonder, “Gee,” when he bought his first house perhaps he had a low down payment, maybe he was a veteran and got a VA loan or some other sort of first-time buyer program where he didn’t have to put as much down because 20-30 percent of the down payment probably means he’ll be liquidating a lot of his savings and or retirement accounts or business accounts to buy this property, so that may not be as appealing. When he mentions that, they might hem and haw for a minute and say, “Well, we do have a lower down payment program. It’s a small business loan.” Invariably what he’s talking about is one of the other SBA programs–sort of the flagship SBA program called a 7A loan. It’s a great loan, but I don’t think it’s a great loan for commercial real estate. And there are a couple reasons for that that we’ll get into, but predominately, it relates to the fact that most 7A loans are floating rate loans and commercial real estate is a fixed asset–it’s a mismatch. Also, I happen to be the SBA program that requires full collateralization. When business owners are having to pledge seconds on their personal residences, it’s because of an SBA 7A loan. Now, they can do 90 percent financing and 90 percent is a whole lot better than 70-80 percent financing, but it may not have all the correct variables in terms of this particular loan program.

What often doesn’t get talked about is that the SBA 504 loan, which can also do 90 percent financing, is predominantly a fixed-rate program and doesn’t require collateral beyond just the project that you’re financing. So, this is a discussion point that happens every day across the country with business owners wanting to buy their own commercial real estate. It’s unfortunate that, oftentimes, the perceived trusted advisor–the banker–pushes them in the direction of either doing a conventional loan, because it’s easier for them, or doing an SBA 7A loan because of secondary market premiums that come into play with 7A loans as opposed to putting all three options on the table, which I’ve always been a big advocate of doing.

 

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