Q+A: Landlord's Questions Regarding SBA Loans
I represent a number of shopping center landlords around town and, in my dealings, it seems like it’s easier to agree with tenants on what market rental rates are than what constitutes good financials. There’s even more gray area when the Tenant is using a loan to start their business. I sat down with Bruce Hurta, CREN member and MCCU SBA Lender, to pick his brain from my point-of-view.
- What kind of vetting is done for a potential Tenant to obtain an SBA loan?
That answer depends whether this is a more risky startup business or an established business with a track record. A startup business owner must provide a business plan including site feasibility analysis, financial projections with well-documented assumptions, personal credentials to operate the business successfully, and ample personal investment to balance the lender’s risk. If this an existing business, the track record will be reflected with profitability in the last three years tax returns, and the aforementioned analysis is not as critical.
- Does the SBA loan mean that someone’s already run through their business plan with a fine-tooth comb or are SBA loans easy to get because they’re secured by the government or have a high interest rate?
Because the SBA loan is partially government-guaranteed to reduce a lender’s potential loss in case of business failure, SBA lenders are able to assume more risk than conventional bank lenders. Some big banks may use SBA loans to comply with federal regulations in the Community Reinvestment Act, and they might take more losses on small loans. SBA lenders, however, cannot continue in the program if their loss statistics on SBA loans exceed reasonable parameters. Having obtained SBA approval should indicate that at least one SBA lender is willing to bet on the borrower’s success based upon thorough analysis according to SBA regulations. SBA loans do not have a high interest rate; however, most SBA loans have a variable interest rate which is adjustable quarterly with changes in the Wall Street Journal (WSJ) Prime Rate. The maximum SBA allows a lender to charge is WSJ Prime Rate + 2.75% (currently 6.75%).
- Do SBA loan borrowers need a certain net worth to obtain a loan?
Yes. Like any other institutional small business lender, SBA lenders must see “skin in the game” from the owner(s). Determining the amount of owners’ investment which is required for a particular loan amount depends upon many factors such as age of business, personal financial strength of the owners, credit ratings and credit scores, collateral provided for the loan, and historical track record of the business.
- What are the perks of an SBA loan tenant prospect? In other words is an SBA loan a better sign to the Landlord than a traditional bank loan or a friends-and-family cash raise?
SBA financing is long term financing; whereas, conventional bank financing is typically shorter term. The SBA borrower is preserving cash flow for rent payments by keeping his loan payments as low as possible (typically a 10 year repayment term). SBA or conventional bank financing requires your tenant to subject their business to a certain level of due diligence. Family and friends may or may not perform due diligence on the business before investing or loaning money to the business.
- What are the cons of an SBA loan tenant prospect?
SBA requires a landlord subordination agreement from all SBA borrowers.