First, consider the basics of our case study. The transaction was an acquisition of a facility by a first-time owner. The total project cost was slightly over $1 million, and the borrower was required to put down equity equal to 25 percent, with the remainder financed through the SBA 7a program. The property is an older facility that has recently undergone a significant facelift, modernizing it with above-average technology upgrades including a sales kiosk.
The facility is in a secondary market in the Midwest, and while the borrower is not in the same city, he intends to make frequent visits to actively manage it. This “active” role of the owner is an important distinction in the SBA world, as the program is intended to fund small-business owners actively involved in their enterprise, not investors seeking passive income streams.
The loan was structured with a Prime-based rate that resets quarterly and a fully amortizing 25-year loan with a prepayment penalty during the first three years. This structure is fairly standard in SBA 7a lending. The borrower originally requested an advance rate of 80 percent; however, since he was a first-time owner and geographically distanced from the property, the lender required cash equity of 25 percent (75 percent LTV).
A unique characteristic of the SBA 7a program is the borrower is able to structure a small amount of working capital into the transaction. This ensures he has some additional funds to access for unforeseen expenses and acts as protection for the borrower and lender. In addition, the SBA 7a program allows capital for expansion, property improvement and debt consolidation, though this particular borrower did not take advantage of it.Overall, the SBA loan program was a good fit for this borrower as it let him access a high level of debt considering his relative inexperience in the industry. To provide an additional level of credit support, he was required to pay down a portion of his personal debt and pledge a portion of the equity in his home as collateral. The additional structure protected the lender against perceived risks from a new owner while extending leverage that’s somewhat uncommon in the current market, even for experienced owners.