SBA 7(a) loan can be a great option for businesses that cannot provide robust credit history to the lenders to avail of any other type of funding. As the loan is partly guaranteed by the SBA here, lenders can be more flexible to approve the loan applications. However, the SBA warns lenders not to be too casual in approving the loan without assessing the credibility and financial history of the borrower.

Eligibility

A business can avail up to $2 million under the SBA 7(a) loan program, while the SBA loan guarantee always stays at 75% of the total capital borrowed. The terms for the funding can be 25 years for buying equipment and property, while it is 7 years for working capital. The interest rates of SBA 7(a) loans are determined based on the loan amount, the term, and the prime rate.

To be qualified for an SBA 7(a) loan, the company should be defined as a “small business” by the agency, and it should be operating for profit within the United States and its possessions. Apart from that, the business should also show proof of having the resources to fund the assets of the company. Most of the time, lenders also require businesses to submit a sound business plan, detailing the purpose of the funding.

Note that real estate businesses and other speculative businesses are not deemed eligible to apply for SBA 7(a) loans. In addition, lending institutions, pyramid sales companies, non-profit organizations, as well as those that engage in illegal activities cannot apply for SBA 7(a) loans. Besides, the borrower should not have any existing debt obligations to the US government either to apply for the funding.

The borrower would also need to submit all the typically required documents for availing a business loan, such as personal financial statements, business plans, and statements, details of tax returns, etc. It usually takes a few days to get the loan approved, however that would depend upon the size of the loan as well as the terms and conditions of the lender.

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Usually, a commercial mortgage can be availed for a 3-year term to a 25-year period. The lengthier the repayment term, the lesser the rates would be. Still, it would be determined based on the risk factors, which is assessed by the lending party after due analysis of the borrower’s financial history. Sometimes, this type of loan can also have a variable rate agreement, which means that the repayment amounts can fluctuate every month. The variable rate is decided based on the scope and potential of the business as well as the property value. 

Applying for a Commercial Mortgage

A commercial mortgage is usually chosen by businesses when they need some additional funding to buy a new property for business expansion or to save on their monthly rental overheads. This can also be a good option for those who already have a property – they can release the value of the building to use the funds for other business ventures.

You can apply for a commercial mortgage even if you have a bad credit score. All you need to apply is the previous years’ profit/loss statements, rent roll, tax returns, photos of the property, and personal financial statement. You can also produce summaries of capital improvements to get the loan approved quickly. However, as the risk would be more here due to your poor credit score, the interest rates could be very higher.

Note that the lending institution would also perform a standard valuation of the property before approving the commercial mortgage. Moreover, there can be additional costs too, such as arrangement and legal fees. Therefore, it is better to clarify every detail carefully before applying for the funding.

Types of Commercial Mortgages

Generally, commercial mortgages are categorized into three types: owner-occupied, residential buy-to-let, and commercial buy-to-let. The first type is meant for businesses that are either looking to buy the building or space where they are currently operating or want to buy a new property to shift their business operations there. Residential buy-to-let funding is meant for those businesses that want to acquire a residential property loan to free up their business operations.

Commercial buy-to-let is similar to the residential buy-to-let type of mortgage; the only difference here is the type of property the business is looking to buy. For instance, this type of funding can opt when a company wants to buy a commercial warehouse to let it out to other businesses. This is the most difficult type of commercial mortgage to acquire though.

Pros and Cons of a Commercial Mortgage

The most striking benefit of choosing a commercial mortgage is that you would not have to pay any monthly rentals anymore. This can be a great thing when you are looking to explore new markets and planning to grow your business reach. You can customize the space as you want and change the layout to suit your business operations as applicable too. Besides, if the repayments are higher than what you can bear, you can always sub-let a free portion of the property to another party for a monthly lease. However, you would need to get permissions from your lender for that.

The interest on the repayment amount for a commercial mortgage is tax-deductible, so that would reduce some financial burden from your shoulders. What’s more, as the value of the real estate grows, the capital of your business would also go higher. Yet the main drawback of this type of small business funding is that you might need to pay a considerable deposit upfront to buy the property. This is usually around 20% of the commercial mortgage amount. In addition, if the commercial mortgage rate is variable, then you cannot determine the exact interest amount to be paid per month, and it can go up any time.

Another downside of buying a property is that you can no longer move to another location in case your business demands it at some point. On top of that, you would be responsible for the maintenance of the building and fixing any problems like HVAC repair or broken windows. Note that if the real estate value drops at any time, the capital of your business will also decline with it. So it is better to weigh all options before making the decision.

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• Managing Receivables – Receivables refer to the amount you are owed for providing your services. Usually, new businesses fail to manage their outstanding receivables, which in turn lead to a shortage of income to run their daily operations. It is reported that about one-third of the small businesses in the US go on with roughly around $15,000 in outstanding receivables.
• Managing Payables – Although the advance payment method helps businesses to charge for their services beforehand, it can take a long time to actually get the invoice paid and process it for their daily operations. Around 60% to 70% small businesses reported that it takes about 25 to 30 days to receive payments after issuing the invoices to their customers, while they still have to pay to their suppliers to ensure smooth business operations.
• Managing Employees – Even though the income of the business is affected due to late payments and outstanding receivables, the company cannot delay employee remuneration. However, most small businesses find it very difficult to pay their employees on the assigned payday because of the lack of cash flow. When employees are not paid on time, the company might not be able to retain the required workforce for daily operations.

Resolving Cash Flow Challenges

Monitoring the payments and receivables on a weekly basis is the best way to keep track of the cash flow. Nonetheless, as these can be sometimes out of the control of the business owner, it is always better to seek out practical funding options to manage the cash flow troubles. For instance, availing a short-term loan from online lenders can be of great help in such scenarios. They release the loan amount very quickly that you can use to fulfill your business’ financial requirements. At the same time, continue keeping an eye on your outstanding receivables and follow up on the invoices promptly. This way, you can repay the loan amount without any hassles.

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Financial forecasting can help businesses to calculate the potential revenue or loss and manage the funds logically in view of that. It can simplify the decision-making process, by assessing the marketing efforts of the recent past and figuring out whether they were worth the cost. Forecasting also helps to understand cash flow in a simpler way, and estimate the sales and probable profits.

Basic Models of Financial Forecasting

There are a lot of different approaches to forecasting business growth, but all of them use any of the following three models.

• Extrapolation – This method analyzes historical revenue data in order to calculate the prospects of the business. It uses a time-series method of quantitative forecasting where the data is collected over a defined period to identify future trends.
• Regression/Econometrics – This method employs a statistical procedure to forecast business growth. The main technique here is to evaluate the relationship between the dependent and independent variables that usually lead to revenue generation.
• Hybrid Forecasting – This method takes practical aspects into account to predict the growth of the business. Instead of using data and statistics for estimating potential sales and revenue, this technique uses knowledge-based forecasting to provide more accurate results.

Before choosing any of the said models for financial forecasting, you need to carefully review the company balance sheet to understand what assets and liabilities you have as of date. Moreover, have an idea of the last year’s expenses as well as the expected costs for the upcoming projects and promotions. Once you have those details ready, get in touch with a financial advisor to select the right forecasting approach for your business.

Remember that the varying state of the economy and the rising competition in the industry can be big factors that can affect the metrics of your forecasting. Then there is the ever-changing technology and seasonal cycles as well; how well you adapt to such things can have a great impact on the financial forecasting for your business as well. Still, with proper financial forecasting, you can always be prepared for any unexpected decline in the business turnover.

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