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Tips for borrowers in securing an SBA loan

The path to a U.S. Small Business Administration loan runs more smoothly when borrowers adhere to the agency's myriad formulas and rules. Here are some things to keep in mind:

  • SBA loans can be arranged through brokers and banks, but the best information is available from quasi-governmental offices called community development corporations (CDCs). There are 280 around the country, staffed by personnel who can walk neophytes through the process step by step.

  • There are essentially two programs available, dubbed 504 and 7(a). For each, the borrowing limit is $2 million. The 504 loan is typically issued at a fixed rate, while the 7(a) has a floating rate. The 7(a) program has some more liberal provisions that allow borrowers to roll soft costs like franchise fees and architects' fees into the loan. A good CDC counselor can steer the borrower to the program tailored to his or her needs.

  • Most SBA loans call for borrowers to put up 20% of their own money as equity in a hotel. There are few exceptions to that rule. Creative financing tactics in vogue a few years ago, which allowed borrowers to count future cash flow or payment of franchise fees toward the equity requirement, have fallen out of favor and won't fly with Washington.

  • The SBA requires active management. You may hire a hotel management company to take over many duties, but the SBA wants to see the borrower on site at the hotel most of each week. The program is not for passive investors.

  • SBA loans can be applied to multiple properties. But the combined total of the SBA-backed loans can't exceed $2 million.

  • Preferred terms are available to some special groups such as armed services veterans. The CDC can provide details on qualifying.

  • Don't expect a free ride. The SBA prides itself on a low default rate and can be quite demanding in its underwriting requirements. The agency prefers management experience. If it finds the experience is lacking, then a strong national brand and a seasoned management company hired to run day-to-day operations give the loan application a better shot at being accepted.

Contact SBA at

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