If you’ve been considering buying a building for your business or making an add-on acquisition to grow your business, now may be the time to act.
Part of the economic relief legislation enacted at the end of December – known as the Consolidated Appropriations Act, the law that created PPP2 and made PPP1 funds non-taxable – were some significant short-term changes to the SBA 7(a) loan program that could put tens of thousands of dollars in your pocket.
You probably know that one of the most important things the Small Business Administration (SBA) does is to provide guarantees to lenders who provide small business loans to small businesses that, without the guarantee, wouldn’t be able to secure financing for working capital, expansion, real estate purchases, and other business purposes. There are different SBA lending programs, but the primary one is the “7(a) program.”
The normal SBA 7(a) guarantee is 85% of the loan value. So, if a borrower is unable to pay an SBA guaranteed loan, the SBA pays the bank 85% of the balance and the bank is only on the hook for 15%.
That guarantee comes at a cost to the borrower, though. The SBA charges a guarantee fee of 2% of the loan amount. So, SBA loans are usually more costly than conventional bank loans.
The Consolidated Appropriations Act made several important changes to enhance the 7(a) program for banks and borrowers. However, these changes are temporary and only apply to loans from February 1 through September 30 of this year.
First, the guarantee was increased to 90% of the loan. This means that banks are better protected and will therefore be able to make loans for projects or for borrowers that might not meet criteria for an 85% guarantee.
Next, the legislation eliminated the guarantee fee. This not only saves two points for every borrower, but also makes 7(a) loans much more competitive with typical bank financing.
Finally, the legislation provides funding for the SBA to make the first six principal and interest payments on all 7(a) loans funding from February through September (up to $9,000 per payment). And those payments can be used by the bank to determine if the borrower can make the loan payments.
These benefits will result in significant savings for buyers. In one transaction we’re involved in, the savings will be over $45,000.
If you’ve been thinking about buying a competitor to expand or real estate for your business, now may be the time. However, because the benefits end in September, you’ll have to move fast. Let me know if you have any questions about the benefits or if we can help you find and close an acquisition.
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