From frying pan to… Business owners who “chose” to take out a hard money business loan for their business are often surprised at how quickly time passes when they are expected to pay off that debt. Of course there are only 2 real solutions to this.
1. Sell the property and pay off the loan or
2. Refinance the debt with another lender.
The third option is to call your rich uncle and ask him to pay it.
The game plan, of course, with most business owners is to give yourself some time to restructure your books, business, improve your credit score, and essentially put yourself in a stronger position to get a conventional mortgage at one time. or two years. However, this may not be enough time or the problems were more difficult than expected. We see many people that their main problem is their personal credit score in the belief that they will increase it drastically, but at the end of the term, the score has only gone up a little. Regardless of the reason, the borrower may not be eligible for a typical conventional commercial mortgage.
A traditional option for business owners to obtain the hard money loan is to go the SBA 7a loan route. This is because the 7a program allows credit scores as low as 520, loan values as high as 90% on refinances, and the borrower can use projections instead of just historical financial data that may not show enough income to pay off the debt. .
But this option has had several drawbacks that make it almost as low-end an option as hard money lending to begin with. For example, the rate typically floats above prime by around 1-2.75%, adjusting once a quarter, with no rate caps. In addition, the SBA typically requires a guarantee fee of 2.75% of 75% of the total loan amount. In short, the benefit is that the borrower gets an option in addition to hard money and the rate is typically lower, depending on what Prime is, than what they might get from another hard money lender.
However, not all SBA lenders are the same and it pays to be informed. For example, there is a bank that offers SBA 7a with a fixed rate of 5 years at Prime + 1 and the bank absorbs the guarantee fee… At the time of this writing, Prime is at 5.25%, so the rate of most borrowers would be 6.25% fixed for 5 years and amortized over 25 years. This is one of the best commercial mortgages in the industry, regardless of whether the borrower is perfect or not.
So, if you’re facing an ever-increasing cash loan and operate your business from a building you own, you may want to consider going SBA Route 7a. Anyway, go out and shop because there are more options than your local bank knows about.