For many small business owners, using an owner-occupied building as collateral has long been a resource for obtaining the necessary capital to grow and create jobs. Unfortunately, those who have a building with a current loan-to-value (LTV) ratio of higher than 75 percent have had few, if any, options for securing additional funds.
Further, the economic downturn over the past couple of years has depressed property values to varying degrees across Oregon. For those of us here in Central Oregon, we have been especially hard hit. This has pushed more and more business owners into a situation where their LTV exceeds the typical 75-percent cap.
The good news is that the Small Business Administration (SBA) has several options for refinancing existing debt as well as providing money for growth and expansion.
First, however, borrowers must meet eligibility requirements of the SBA program. Here are some of the eligibility requirements:
• Businesses must be “for-profit” (and, hopefully, making a profit).
• Debt must have been paid as agreed for the past year.
• Debt must mature within five years or the refinance must result in a 10-percent cash-flow savings to the borrower.
• The debt must have been incurred at least two years prior to the application date.
The most common candidate for a debt refinance under the SBA program is a business that has its real estate loan coming due, yet the current LTV doesn’t meet the typical conventional loan 75-percent requirement. Some accounts indicate this is a common scenario that will be prevalent for the next 12 to 24 months.
For business owners faced with this reality, the best refinance alternative is through the SBA program since it is not LTV driven. With such a loan, the business owner can avoid an expensive balloon payment, stay in their building and keep their cash to either pay down the loan (and meet the LTV limit) or fund their operations.
Another example is when a business purchases real estate to expand and rolls in other eligible debts such as a line of credit or business acquisition loan. For instance, Wells Fargo recently helped a manufacturer buy a larger building, refinance its business acquisition debt, and obtain additional capital for growth and expansion using an SBA loan. To top it all off, its new payment for the combined debt was 30 percent less than what it was paying prior to the refinance.
As the economy continues to recover and business owners and real estate investors return to growth mode, it’s a great time to explore refinancing and debt consolidation options.
To get started, schedule time to meet with a local lender. Most commercial banks offer some level of SBA lending and top lenders can provide benefits such as a higher loan amount, no upfront fees and a streamlined decision process that saves the borrower both time and money.
It’s best, however, to choose an SBA-preferred lender. This designation is a license for certain lenders to independently complete an eligibility determination, a credit approval and to fund loans. An experienced lender will help you through the process every step of the way. Set an appointment today to discuss options for refinancing commercial real estate and other eligible debts.
The SBA’s Oregon office is located in Portland. It can be reached at 503-326-2682 and can provide you a list of SBA-preferred lenders.
Tim Brines is a business development officer with Wells Fargo in Bend. He can be reached at 541-633-1924 or tim.brines@wellsfargo.com.
