Now may not seem like a very attractive time to own real estate in the warehousing, distribution, or manufacturing sector. Not only have the past two years turned real estate, of all areas, into an incredibly uncertain investment, but the Federal Reserve is also in the midst of a series of interest rate hikes that will make real estate financing more expensive.
And yet, it is still true to say that owning a warehouse, a distribution center or a factory can be a great investment for a small or medium-sized business. People will continue to shop online and retailers will need to stock inventory in strategic locations to reach customers. Oftentimes, Amazon sellers don’t own real estate – they fulfill orders through Amazon and also fund everything through it. Today, many businesses are realizing that they can get into the “buy” box on Amazon while cutting costs by buying real estate.
Small business owners typically use 7a loans from the Small Business Administration (SBA) for these acquisitions, which have generally been a safe bet, as they are backed by the US government and offer extremely high loan-to-value (LTV) ratios. .
However, with interest rate increases, the market is changing for SBA 7a borrowers. 7a loans typically have floating interest rates, which fluctuate based on actions taken by the Federal Reserve. Due to the continued series of rate hikes scheduled for 2022 and 2023, 7a loan repayments are potentially hundreds of dollars more expensive per month than they were this time last year. This poses a huge risk for SBA 7a borrowers, as increased mortgage payments can significantly affect their bottom line. However, in order to mitigate this risk, the SBA recently introduced the SBA 7a to SBA 504 Refinance Program, which allows SBA 7a home borrowers to refinance into a low-cost, fixed-rate SBA 504 loan.
Here are five key questions to consider when evaluating an SBA 504 refinance for the industrial sector.
You need working capital now. If you’re doing well in e-commerce, for example, you have an insatiable need for cash to get more inventory to sell. Refinancing from an SBA 7a loan to an SBA 504 loan can free up cash for working capital of up to 20% of the property’s appraised value. The increased need for working capital to finance the growth of e-commerce has led many businesses to turn to Amazon Lending or similar services that make it easier to buy inventory and get cash quickly, but this is of an expensive option. An SBA 504 loan reduces the cost of extracting capital from your business. Instead of paying 10-12% interest over one year, you pay 6-7% over 25 years. Also, if you’ve owned a property for a few years, it’s most likely gone up in value. It is a cheap source of access to this capital so that your business can grow.
Interest rates are rising. We are currently experiencing skyrocketing inflation, and the only way the Fed knows how to fight inflation is to raise rates. Until they get the hang of it or see they’re slowing the economy, it’s hard to know how far they’ll go. It’s better to refinance now, rather than later when rates are even higher. Refinancing from SBA 7a to SBA 504 locks in your interest rate for the life of your SBA 504 loan, which is typically 25 years. Consider this: for every million dollars in loans, a 1.5% rate hike means an additional $15,000 in payments per year. If, as expected, the Fed raises rates another 2%, that’s $35,000 to $40,000 a year in additional reimbursement costs.
Real estate values are falling. Basic Fact: Borrowing money on a declining asset is more difficult. Of course, homeowners applying for loans may have a harder time qualifying in today’s market. But industrial borrowers have external cash flow from their business, and they don’t rely solely on the value of their real estate assets to generate income. This makes it easier for lenders to take out loans related to industrial real estate. All the same, a drop in the value of your property will impact your ability to free up capital. If you think the falling market is depleting the value of your property or rising interest rates will lead to higher payments, it’s better to lock in the loan now than wait.
Speed is a priority. Most traditional banks require two years of tax return information before they’ll even consider giving you a loan. A non-bank lender specializing in industrial real estate financing may only require a year of documentation and is better equipped to accurately assess your business. Additionally, a lender specializing in SBA 504 loans will be experienced in guiding you through the necessary application procedures and speeding things up. Banks, with a wider range of potential borrowers and scenarios to assess, often take several months to approve a loan. Non-bank lenders who have the process down to the science can usually close the deal in 45-60 days.
Your credit profile is “risky”. Non-bank lenders can build a business or borrower’s credit profile quickly and tend to have a much more lenient “credit box” — the range of risk they’re willing to take on — than most. banks. This often means you won’t be penalized for experiencing a cash flow disruption due to COVID-19, or if your business has been in ramp-up mode and has just hit profitability. Using specialized technology and protocols that enable specialist non-bank lenders to closely understand the business owner’s true risk profile, business model and real estate, these lenders can confidently make decisions in credit that most banks would not be comfortable financing.
Liberty SBF: the lender for small business mortgage borrowers
Liberty SBF offers low cost financing for low balance commercial real estate and term loans for working capital. Loans of $500,000 to $15 million are available, with a loan-to-value (LTV) ratio of up to 90%. We have a flexible credit box and can underwrite agreements for businesses that only have one year of cash, unlike traditional institutions that require two to three years. We see a lot of inexperienced commercial borrowers turning to conventional lenders and opting for a variable rate loan; however, these borrowers could see their interest rates double this year. An SBA 504 loan fixes your interest rate for 25 years, allowing you to eliminate the risk and uncertainty of variable loan repayments.
We are seasoned experts in identifying businesses that qualify for these great loans, and we can guide clients through the SBA loan application process. These loans can be complex to process and secure because multiple parties are involved, including state officials from the SBA, the SBA, and Liberty SBF as the lender. Because we stay with you every step of the way, we are able to close these loans quickly. In general, we can provide you with an estimate within 48 hours and give you a commitment within 15 days, subject to receipt of all the documents requested. From there, it usually takes 30-45 days to close. We can streamline the process and close transactions in 60 days, when a typical bank turnaround is 120 days or more.
When a business approaches us, the first step is to review the options – identifying whether it qualifies for an SBA loan or whether it is more appropriate to review a conventional loan option. Critically, we have the expertise to understand the scenario, business model and ownership, then select a type of loan that we believe makes the most sense and stay true to the business every step of the way.