It might not seem like a very attractive time to own real estate in the warehousing, distribution or manufacturing business. Not only have the last two years turned real estate, across the board, into an incredibly uncertain investment, but the Federal Reserve is also in the middle of a series of interest rate hikes that will make real estate financing more expensive.
And yet, it’s still true to say that owning a warehouse, distribution center or factory can be an excellent investment for a small or medium-sized business. People are going to continue to shop online, and retailers are going to need to store inventory in strategic locations to get to customers. Often, Amazon sellers don’t own real estate — they fulfill orders through Amazon and finance everything through it as well. Now, many businesses are realizing they can get to the “buy” box on Amazon and still cut costs by buying a piece of real estate.
Smaller business owners commonly use Small Business Administration (SBA) 7a loans for these acquisitions, which have typically been a safe bet, since they’re backed by the U.S. 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 ongoing series of rate hikes predicted for 2022 and 2023, 7a loan payments are potentially hundreds of dollars more expensive per month than they were this time last year. This poses a huge risk to SBA 7a borrowers, as increased mortgage payments can drastically affect their bottom line. However, in order to mitigate this risk, the SBA recently introduced the SBA 7a-to-SBA 504 refinancing program, which allows SBA 7a real estate borrowers to refinance into a low-cost, fixed-rate SBA 504 loan.
Here are five key issues 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 to an SBA 504 loan can release cash for working capital of up to 20% of the appraised property value. The greater need for working capital to fund growth in e-commerce has led many companies to turn to Amazon Lending or similar services that make it easy to buy inventory and get money fast, but this is an expensive option. An SBA 504 loan lowers the cost of getting capital out of your business. Instead of paying 10%-12% interest over a year, you’re paying 6%-7% over 25 years. Further, if you’ve owned a property for a couple of years, it has most likely increased in value. This is a cheap source of getting access to that capital so your business can grow.
Interest rates are rising. We’re currently experiencing a precipitous rise in inflation, and the only way the Fed knows to fight inflation is by raising rates. Until they get a grip on the situation or see that they’re slowing down the economy, it’s hard to know how high they’ll go. It’s better to refinance now, rather than later on when rates are even higher. Refinancing from SBA 7a to SBA 504 locks in your interest rate for the lifetime of your SBA 504 loan, which is typically 25 years. Consider this: For every million dollars of loan, a 1.5% rate rise means an extra $15,000 in payments per year. If, as predicted, the Fed puts up rates a further 2%, that’s $35,000-$40,000 per year in extra repayment costs.
Real estate values are declining. Basic fact: It’s harder to borrow money on a declining asset. For sure, homeowners applying for loans may have a harder time qualifying in the current market. But industrial borrowers have outside cash flow from their business, and they’re not solely dependent on the value of their real estate assets to produce income. This makes it easier for lenders to underwrite industrial real estate-related loans. All the same, a drop in the value of your real estate will impact your ability to release capital. If you feel like the declining market is depleting the value of your property, or that increased interest rates are going to lead to higher payments, it’s best to lock in the loan now rather 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 might require only one year of documentation and is better equipped to accurately assess your business. Furthermore, a lender specializing in SBA 504 loans will be experienced in walking you through the necessary application procedures and will speed things up. Banks, with a wider range of potential borrowers and scenarios to assess, often take many months to approve a loan. Non-bank lenders that have the process down to a science can typically close the deal in 45-60 days.
Your credit profile is “risky.” Non-bank lenders can quickly build a credit profile of the business or the borrower and tend to have a much more forgiving “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 disruption to cash flow because of COVID-19, or if your company has been in ramp-up mode and has only just hit profitability. With specialized technology and protocols that allow specialist non-bank lenders to closely understand the true risk profile of the business owner, the business model and the real estate, these lenders can confidently make decisions on credit that most banks would not be comfortable financing.
Liberty SBF: The Lender for Small Business Real Estate Borrowers
Liberty SBF offers low-cost financing for small-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 deals for businesses that have only one year of cash flow, as opposed to traditional institutions that require two to three years. We see a lot of inexperienced business borrowers going with conventional lenders and opting for a floating rate loan; however, those borrowers could see their interest rates double this year. An SBA 504 loan fixes your interest rate for 25 years, allowing you to take the risk and uncertainty of changeable loan repayments off the table.
We are seasoned experts in identifying businesses that qualify for these favorable loans, and we can guide clients through the entire SBA loan application process. These loans can be complex to process and secure because there are multiple parties involved — including SBA state representatives, the SBA and Liberty SBF as a lender. Because we stay with you every step of the way, we’re able to get these loans closed quickly. In general, we can get you a quote within 48 hours and provide a commitment within two weeks, subject to receiving all the required documents. From there, it typically takes 30-45 days to close. We can streamline the process and get deals done in 60 days, whereas a typical bank timeline is 120 days or more.
When a business approaches us, the first step is to look at the options — identifying if they qualify for an SBA loan or if it’s more appropriate to look at a conventional loan option. Critically, we have the expertise to understand the scenario, the business model and the property, then select a loan type that we think makes the most sense and stick with the business every step of the way.