The Benefits of a Small Business Administration (SBA) Loan

Owning a business is a labor of faith, love, and financial risk, and the additional expense of owning an entire commercial building can seem so intimidating that folks don’t think it’s even possible - the sizable downpayment, the intimidating application process, the emotional impact of more financial responsibility. Many business owners don’t think owning their own building is in the cards for them. 

But it could very well be! 

With a Small Business Administration loan, it’s possible for many business owners to invest in their own commercial real estate (and even provide great spaces for other small businesses). Eli has worked with many clients who started out looking to lease a building, found out about SBA loans, and ended up buying their own building for a comparable amount of money as they’d have spent on a lease. With an SBA loan, they were able to put their money directly into an investment in their own business and their own future financial stability. 

Small Business Advocacy in the Loan Space

To help potential buyers understand the process, we spoke with Nik Merrick, the commercial loan manager of MK+ Associates. Nik brings his own personal experiences with small business and entrepreneurship to his work with clients.

Born and raised in Portland, Nik is devoted to our city and loves the Portland community. He has opened multiple restaurants, including Kinara Thai Bistro on SE 18th and Padee on NE 28th and Burnside (one of our favorite Thai restaurants, which is open for business with outdoor seating, by the way!). Nik has been a restaurant startup consultant. Additionally, he worked as a general contractor for both commercial and residential projects. 

He also has a Master’s degree in education and worked as a middle school teacher as well as a crisis intervention specialist in public schools with underprivileged youth, work he loved, especially because of his own personal background, but when he was stabbed in the gut while intervening between two students in conflict, his wife demanded he find a new profession. He did not disagree.

Now, Nik is in the business of helping small businesses because it feels like helping make people’s dreams come true. To him, community is everything. He says, “If we don’t have people in our community who are honest and ethical, who we can turn to, then the last stitches of our community falls apart. At the end of the day, we’re still living around each other, we have to find a way to make our community whole and stitch it together with love.” 

We are thankful that Nik spoke with us to help demystify the SBA process. Here is what we learned from him. 

Understanding Conventional Loans

First, to understand SBA loans, Nik contrasts them to conventional investor loan products. Conventional investor loans make a distinction between loans above $6 million and loans below. With a loan value higher than $6 million, you can secure interest rates in the 2% range. Below $6 million, interest rates can range between 3-4%. The conventional loan product is generally focused on investor property acquisitions and refinances.

With conventional loans, investors can access up to 75% (but typically 65%) loan-to-value (LTV) ratio. This means you can get a loan for up to 75% of the value of the real estate but will need to come up with the other 25% on your own, out-of-pocket, and if you’re borrowing under $6 million, then your interest rates could be double that of an above $6 million loan. 

The terms of a commercial loan are also important to understand. An amortization schedule is your payment schedule, a breakdown of what you owe spread out over years. (The word amortization comes from the Latin root “mort” meaning to kill, so you’re basically killing off your debt.) In the commercial world, your amortization schedule is generally spread out over 20-25 years (with the exception of multifamily transactions that traditionally offer a 30 year amortization schedule). 

However, here’s the fine print. The maturity of the loan could be as little as 3-5 years and as long as 7-10 years. The maturity date is the final date of full payment for the entirety of the loan (a balloon payment). This means that though the payment amount might be amortized at 25 years, you might have to pay the loan in full in 5 years. 

There is lots of convection and turn-around in the commercial space. That’s because of the terms. Typically, with commercial lending for a commercial property, the expectation is that the borrower will refinance 3-4 times. (In contrast, consider home loans. Many homeowners don’t refinance at all or refinance just once.) 

The bottom line: With conventional loans under $6 million, you pay higher interest rates, must come up with a minimum of 25% out-of-pocket cash, and you likely have to pay your loan off in full in a short amount of time (within 10 years). 

Enter The Small Business Administration Loan

Created in 1953, the Small Business Administration (SBA) is a cabinet-level federal agency in the United States government that is dedicated to small business development. SBA offers assistance such as information and advising, but also capital through loans, grants, and relief programs. The overall SBA loan program is split between two programs: the 7a program (for operating cash) and the 504 program (for real estate). 

In contrast to conventional loans, an SBA loan can go up to 90% LTV (i.e. 80% LTV on the real estate and another 10% for operating capital) with an interest rate still from the high 2% to low 3% range. There is no $6 million minimum. Note that SBA loans have fees that can be as high as 3% of the loan amount, but fees can usually be wrapped into the loan, so the borrower doesn’t have to pay for this out-of-pocket.

Additionally, with an SBA loan, business owners can expect a fully amortizing 25 year note with no balloon payment at maturity. This is a huge advantage over traditional conventional loans.

SBA loans are significantly different from any other commercial loan product on the market in that they give middle class business owners access to large amounts of cash that they otherwise wouldn’t be able to obtain, especially in a COVID environment, when lenders have less appetite for risk.  

Currently, Nik has clients looking for land to develop a concrete tilt up warehouse to support their renewable energy company. With an SBA 504 product, they can purchase real estate with a 10% equity contribution. In other words, a successful local company can secure millions of dollars, depending on how much cash flow the business is bringing in. You can't do that with any other loan product on the market.

The bottom line: With SBA, you get all the good stuff: high loan-to-value ratio, a low interest rate, and full-term amortization and maturity schedule. This combination is what allows small business dreams to come true.