January 23, 2012

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Setting Up Your Own Shop

SBA Loans Help Business Owners Seize Opportunities

Richard Gray

January 23, 2012

Although there are probably some tough times ahead, we are beginning to see hope emerging from behind the dark clouds of economic uncertainty. For those companies wanting to take advantage of some of the opportunities created by the recession, tapping Small Business Administration (SBA) loans to become property owners can be one of the smartest strategies out there. While the credit market is still tight, even for well-qualified businesses, SBA loans are still one of the most dependable financing options, thanks to the influx of federal stimulus dollars, favorable terms, and government backing. Cash-starved owners and foreclosure sales are resulting in an unusually high volume of commercial properties priced unusually low. Consequently, buyers can access prime real estate for much less where vacancy rates have steadily increased (some to double digits). Commercial properties ranging from office buildings, warehouses, and retail outlets, to special purpose-type facilities, such as restaurants, lube shops or car washes, qualify for SBA financing. SBA loans are a perfect fit for 95 percent of Utah small businesses. Because SBA loans are partially guaranteed by the government, most banks are willing to give them to businesses that may not qualify for traditional loans. Other reasons SBA loans are more appealing than conventional commercial loans include: (1) SBA loans require 10-20 percent down versus 25-35 percent for traditional loans; (2) interest rates are lower on properties less than $1 million; and (3) borrowers can sometimes avoid balloon payments that conventional loans encounter. If you’re a small business owner, consider the many benefits of owning your own commercial property. The money you pay each month goes towards building equity instead of into someone else’s pocket, making you less susceptible to increased rent payments. You can also realize residual monthly income by leasing out any excess square footage within your commercial property. You have more control over your situation and can put money into a facility that meets your needs, instead of doling out cash to improve someone else’s building. Depending on how you structure the purchase, the property could also become part of your retirement portfolio as a rental property. Sound attractive? SBA loans are a good deal for small business borrowers, but you must meet the four C's of commercial lending to be eligible for owner-occupied SBA financing: Cash flow The debt coverage ratio (DCR) is used to measure cash flow and evaluate whether a business can afford mortgage payments. DCR is determined by dividing net cash flow from operating income by debt. Typically, lenders require a DCR of 1.25 or higher. Other ways lenders evaluate cash flow is by examining your company’s profit and loss statement or its statement of cash flows. In the P&L, earnings before interest, taxes, depreciation and amortization (EBITDA) is the key figure. In the statement of cash flows, the key figure is cash flow from operating activities. These evaluations consider all of your debt obligations and help a lender determine your ability to repay the debt. Credit As a small business owner, you are the business, so both your business and personal credit reports will be used to determine your ability to fulfill financial obligations. While SBA loans can overcome certain shortfalls in loan credit applications, good personal and business credit is a necessity. On your business credit report, lenders will look at information regarding classification (based on size and creditor payment history), outstanding liens, and pending lawsuits. In addition to pulling your credit history, lenders will review your company’s financial statements for the past few years to ensure your company’s various financial ratios are on par with industry averages. Collateral To be eligible for an owner-occupied loan, most banks require that you be the majority tenant in the space, occupying at least 51 percent of the building. The building you are occupying is then used as collateral for the loan. Lenders will also calculate the loan-to-value (LTV) ratio by dividing the loan amount(s) by collateral value. This shows the difference between what a property is worth vs. what is owed. Typically, a bank will lend up to 70-75 percent of the value of an owner-occupied property. Character The first three Cs revolve around hard-and-fast numbers, but lenders also consider a non-financial factor when qualifying potential borrowers: character. This includes your business philosophy, past experience, business savvy, education and work ethic. If you are lacking in the other Cs, this is your opportunity to shine. If you meet the above criteria, your lender will determine the type of SBA loan that meets your needs within the bank’s risk tolerance—and you will be on your way to owning your very own commercial property. For more information on how you can benefit from SBA owner-occupied lending, visit SBA.gov or visit your local SBA-preferred-lender bank. Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, one of Utah’s largest community banks with 12 branches across Salt Lake and Utah counties. Located in the bank’s Murray office, Gray has assisted local small businesses in obtaining SBA funding for over 25 years. Member FDIC.
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