Conventional Commercial Loans vs. SBA Loans: Closing Costs
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The Small Business Association or “SBA” was incorporated by the US Government to ensure small businesses succeed and are eligible for commercial loans. While SBA loans follow a different process, they are similar to conventional commercial loans. The factors that distinguish the two loan types are government guarantees, certain terms, interest rates, and fees and closing costs.
Conventional Commercial Loans
Compared to an SBA loan, a conventional commercial loan today has less closing costs, higher rates, and lower leverage. Commercial loans require the borrower to have strong business financials and follow some very strict terms. Coupled with a higher interest rate the borrower must also pay certain closing costs, although with less lender fees than an SBA loan.
Commercial lenders don’t always allow for fees and closing costs to be financed in the loan.
• Loans fees, if financed includes points fee, application fee and credit report fees
• Prepaid interest, if financed
• Inspection fees, approximately $0.10 per sq. foot
• Appraisal, usually $3,000- $5,000 depending on the appraiser
• Environmental report
⁃ Environmental screen costs $500 – $1,500
⁃ Phase I Report costs $2,500-$3,000 ( required for most industrial property)
⁃ Phase II Report costs $4,000+
• Insurance
• Title Insurance, half paid by buyer, half by the seller
• Recording fees
• Documentary Stamps on the Notes
• Property taxes, shared with the seller
Typical closing costs for a buyer on the purchase of a commercial property using conventional financing are in the range of 2.5-3% of the purchase price.
SBA Loans
SBA loans are an amazing prospect to reignite small businesses. The SBA has two main loan programs for commercial real estate, the SBA 7(a) and SBA 504. Both programs, backed by government legislation, played a big part in retaining small business success and creating new opportunities for small business concerns. A very strong characteristic of these loans is that the lender is protected with a government guarantee. While the borrower does pay significantly higher fees and closing costs compared to conventional commercial loans, the interest rate will offset the costs over time. A good thing about SBA loans is that closing costs can be financed with the loan.
Borrowers of SBA loans 7(a) and 504 loans saw a complete waiver of the closing fees and related fees last year, but the funds utilized to do so ran out by the end of 2010. Both 7(a) and 504 loans have different costs associated.
SBA 7 (a) closing costs
Closing costs include:
• Origination Fee, 1% in some instances
• Guarantee Fee, 1.75% – 3.75% depending on the loan amount
• Appraisal Report, usually $3,000-$5,000
• Environment Report, $1,800 to $2,000 for a Phase I Report
• Title Fee, shared with seller
• Attorney fee, approximately $2,500 – depends upon lender
• Packaging Fee, approximately $2,500 – depends upon lender
• Insurance
SBA 504 closing costs
All of the fees are added to the loan amount in the case of the 504 loan. This allows the borrower to amortize the costs during the term of the loan. Generally all the closing fees are included as a percentage of the cost, they include:
• Origination Fee, 1% in some instances
• Bank Loan Fee, 0.5% of 50% of the loan, this is paid to the bank which pays the fee to the SBA’s representative
• Guarantee Fee, 0.749% on acquisitions and 1.043% on refinances
• CDC Processing Fee, 1.5% of 40% of the loan
• Funding fees, 0.25% of 40% of the loan
• Underwriting Fee, 0.375% – 0.4% of 40% of the loan
• Reserve, .5% of 40% of the loan
• Fee on interim loan, 1% of 40% of the loan
• Servicing fees, will be included in the interest rate
• Title fee, shared with buyer
• Insurance
While the fees may seem like they would make SBA financing undesirable to small business owners, the fact that borrowers can reach a loan of up to 90% of the purchase price with long term fixed rates makes SBA financing a good deal. Any borrower considering financing with SBA should know that they should hold on to the property for at least 5 years to reach the benefits of the low fixed rate and absorb the costs of all the up front fees.