First of all, most hotel owners go to the SBA programs due to the relatively high level of financing available. Both the SBA 504 and SBA 7a allow 85% loan to cost financing, enabling owners to keep as much cash in their business as possible. Conventional financing is currently capped at around 65% loan to value on purchases, as a comparison.

So, which is more appropriate for your situation?

Traditionally, the 7a is reserved for deals under $2,000,000 while the 504 will go up to $7,000,000. However the lines are blurred. Banks will structure 504’s as low as $1,000,000 and there are a few that will take the 7a up to $3,000,000.

Although both programs are guaranteed for the bank by the Small Business Administration, the loan structures are very different. For example the 504 is set up as 2 loans. The first lien position loan is the Bank piece. It’s make up will normally look something like a 5 or 10 year fixed with a 20 to 25 year amortization as is 50% loan to value. The second lien position loan is the CDC piece which is a 20 year fixed, 20 year amortization loan normally representing 35% of the loan to value. The blended interest rate between the 2 is currently in the loan 7%’s, upper 6%’s.

The SBA 7a in contrast is one loan of which 75% of the balance is guaranteed by the SBA in case of borrower default. It is set up as a fully amortizing 25 year term, with a floating rate (most of the time, we work with a few that offer this as a 5 year fixed). One of the biggest complaints of the 7a is the SBA guarantee fee of 2.75% of 75% of the total loan amount. Keep in mind however that this can be negotiable. There are a few banks that will pay for this fee out of their yield spread if they like your loan request. The rate is currently around 1% plus prime or in the low 6%’s.

Again, the 504 is normally associated with larger loan amounts and offers long term fixed rate financing. While the 7a is more thought of for smaller deals with a floating rate(however there are banks that offer this as a 5 year fixed/25 year amortizing loan).

Another important detail on the SBA 7a is this can be an excellent option for borrowers with “hair”. Meaning more underwriting leniency can be found with this program than virtually all other commercial mortgages including the 504. Credit scores can go down into the 500’s. Debt coverage ratios only have to be a 1.1 (compared to a 1.3) and future projections can be used if current level of cash flow cannot support the proposed debt.

So which is better? You decide.

Author: Jeff Rauth
Article Source: EzineArticles.com
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