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Monday, February 17, 2014

SBA Loans: Beware of Shorter Amortizations

As the money markets continue to open back up and commercial loan sources become more plentiful - more banks are now considering funding guaranteed SBA loans for businesses WITHOUT the requirement of using commercial real estate or major long-life equipment as collateral. But beware of using the standard 20-25 year amortization schedule when trying to pre-qualify these type of loan requests as that may get you into trouble down the road. We just had a client whose deal fell out during the final underwriting stage because the loan term was going to be limited to 7 years, instead of the most common 20-25 year terms that accompanies most SBA loans with real estate. When the underwriter and/or loan committee decided to limit the term of the loan to that shorter period - the annual debt service amount went up significantly and the minimum debt service coverage ratio of 1.25 could no longer be met. Thus, the loan was denied.

The SBA’s loan programs are generally intended to encourage longer term small-business financing. However, actual loan maturities are based on (1) the ability to repay, (2) the purpose of the loan proceeds and (3) the useful life of the assets financed. Maximum loan maturities have been established: 25 years for real estate, up to 10 years for equipment (depending on the useful life of the equipment) and generally up to seven years for working capital.

To avoid confusion and wasted time and effort, always try to get a clear, complete and detailed breakdown of the USE OF PROCEEDS for the loan request early on in the loan pre-qualification process so you can accurately determine what amortization schedule to use in projecting loan payment amounts and annual debt service. It's always best to let a borrower or potential new client know as early on as possible in the process if you don't believe they'll be approved for the loan amount they are requesting.

For more information on SBA loan programs, visit us at or call Tony at 813-833-3132.

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