Commercial mortgages backed by the Small Business Administration (SBA) are an attractive option for business owners because of their low rates and business-friendly terms. And the lenders who offer SBA loans like them as well – mainly because the U.S. government guarantees a portion of each loan.
The problem is that all small business owners are not able to qualify for SBA loans. Most originators who have sought this option for their small-balance clients know this. But they may not know about the alternative solutions available in today’s competitive market.
The SBA reports that around half of the 28 million small businesses in America are operated outside the home. If you consider the fact that a sizable number of business owners are not able to qualify for SBA loans, the opportunity becomes clear. You can establish a new revenue stream for your business by offering alternative solutions to small business owners who have shown a pressing need for mortgage financing.
Here are some of the most common reasons why small business owners fail to qualify for SBA loans, followed by fallout alternatives you can present to your clients.
Common reasons for SBA loan rejection
Business owners must meet certain requirements to qualify for the SBA Certified Development Company (CDC)/504 or 7(a) programs, which are the real estate options participating lenders offer. Unfortunately, many prospective borrowers fall short for the following reasons:
The structure of a business can render it ineligible for an SBA loan. A few of the most common disqualifying factors include:
- The applicant is not determined to be a small business
- Avg. net income after taxes over the last 2 years must be less than $5 million
- Tangible net worth needs to be $15 million or less
- The business owners don’t have enough equity in their business
- For a new business, the borrower should have approximately $1 of cash or business assets for each $3 of the loan
- For an established business, the post-loan business balance sheet should show no more than $4 of total debt for each dollar of net worth (this may vary by industry)
- The borrower has been in business less than a year and has no industry experience
Ineligible use for funds
Business owners often wish to refinance their commercial property in order to consolidate debt. Unfortunately, the CDC/504 Program lists that as an ineligible use of funds. SBA programs also prohibit borrowers from using the loan to repay delinquent IRS withholding taxes, sales taxes, or similar funds.
Lack of documentation
Many entrepreneurs and self-employed individuals have difficulty producing tax returns that accurately illustrate the success of their business. Those who fall into this category face significant challenges when applying for an SBA loan.
Ineligible real estate
A prospective borrower will fail to qualify for an SBA loan if the real estate in question is either an investor property or an owner-occupied property of which they occupy less than 51%.
It is also worth mentioning that some borrowers who actually do qualify for an SBA program eventually back away from the deal when they learn about some of the associated fees, such as the loan guaranty fee of 3 to 3.5% of the SBA loan portion.
SBA Fallout Solutions
Borrowers who fail to qualify for SBA loans may not know that other options exist. Here are 2 alternative solutions you can use capture additional business and close more deals.
Short-term bridge financing
If your client has a pressing need for financing, a short-term solution may be the best option to ensure they get the funding they need right now. Then you can work to address the reason for their denial and, if possible, correct it in time for another refinance down the road.
For instance, a prospective borrower may not be able to secure an SBA loan because of their business’ projected cash-flow. If the borrower is confident they can improve earnings within the next year, it could be a smart move to take out a bridge loan for the time being and try for the SBA loan again in a year’s time.
Since this type of loan is really just a stop-gap measure, it would be wise to pitch the option as part of a larger plan for your client’s finances. Then the client will be more likely to retain your services when the need for a longer-term solution arises.
Non-bank alternative programs
Not all business owners who fail to qualify for an SBA loan will be willing to settle for a hard money solution. These prospective borrowers will want you to provide them with options that either closely mirror SBA programs or represent an equivalent value.
Those types of programs are less common, but they do exist. Here are 3 solutions Silver Hill Funding, LLC offers to business owners looking for an SBA alternative:
- Complete Program
Borrowers who require flexibility beyond what an SBA lender can offer may be a better fit for a standard non-bank solution, such as Silver Hill’s Complete Program. Many of the SBA restrictions on the use of loan proceeds and general borrower/business makeup are lifted, allowing a wider range of business owners to secure the funding they need.
Our Complete Program does feature higher interest rates than a typical SBA solution, but the increased flexibility and expedited transaction process are a reasonable trade-off for many business owners.
- Stated Owner-Occupied Program
This stated income program is a smart alternative for borrowers who struggle to provide the documentation necessary to secure an SBA loan.
The Stated Owner-Occupied Program utilizes a proprietary algorithm that enables Silver Hill to pull data from various sources, meaning borrowers can get approved without having to provide business financial statements or personal/business tax returns. In fact, the only documents needed at the beginning of a transaction are a loan application and credit report.
Your clients may be familiar with stated income alternatives, but they likely associate any such program with unfavorable terms and high interest rates. Our stated income program gives business owners the opportunity to secure a fully-amortizing, long-term loan at a competitive interest rate – much like an SBA loan.
- Bank Statement Program
The Silver Hill Bank Statement Program is an innovative solution for credit-worthy borrowers who would rather use bank statements instead of tax returns to prove their income.
To determine whether a borrower is able to repay a loan, our expert underwriters review 12 consecutive months of bank statements for the business’ operations to determine gross revenue. We then apply an industry standard expense factor to determine the net cash flow available to cover the business, personal, and subject property debt obligations and debt service coverage. It’s a simple way for successful business owners to qualify for commercial mortgage financing.
With some digging, you may be able to discover other non-bank lenders that offer additional SBA fallout solutions. Armed with these alternative options, you can grow your business by helping an underserved group of business owners secure the funding they need.
The CDC/504 and 7(a) programs are fine solutions for eligible small business owners. However, it’s important to remember that alternative solutions do exist for those who fail to qualify for an SBA loan. If you have an owner-occupied deal that needs a home, feel free to reach out to one of Silver Hill’s Regional Managers today. You can also price the scenario yourself by using our free mortgage payment calculator.