You now require financing after discovering some gas stations that are for sale. There are numerous misconceptions regarding which type of financing, SBA or conventional, is superior. There is a widespread misconception that the SBA provides expensive or substandard financing. Additionally, many individuals believe that conventional loans are less expensive than government-backed business loans.
The positive aspect is that your calculator will never lie. Using cost of funds and return on investment calculations, you can always choose the best option.
The advantage of conventional financing for gas stations and convenience stores is that it typically has an interest rate that is a little bit lower than that of the SBA, and the approval and closing times are typically a little bit quicker than those of SBA financing. Additionally, there is typically less paperwork involved in the procedure. A borrower will typically approach a local or regional bank for conventional financing, and the borrower will frequently establish a depository relationship with the bank.
The fact that working capital, inventory, and good will typically cannot be financed with conventional financing is one of its drawbacks. Additionally, the amortization periods are typically shorter. Typically, these notes are due in five to ten years. This indicates that you will need to refinance at the note’s conclusion.
Again, your calculator won’t tell you anything false.
SBA financing typically has a higher loan-to-value (LTV) ratio than conventional financing, and unlike many conventional lenders, which only finance the actual value of real estate and machinery and equipment, SBA financing frequently allows you to finance good will or business value.
The guarantee fee—typically 3.5 percent of the loan’s guaranteed portion—and the possibility of a longer approval time are both disadvantages of SBA financing. However, this typically occurs with banks and lenders that do not have Preferred Lender status (PLP) and must submit their transactions through local district offices. In most cases, the interest rate you pay will be higher than with traditional financing.
There are other choices. This asset class frequently receives Stated Income financing, but the Loan to Value (LTV) is typically lower. Additionally, larger loans (greater than $1,000,000) are typically impossible. The majority of stated income programs claim to offer financing at a rate of 65%, but the actual rate is closer to 55% due to the fact that they do not lend against good will and frequently only lend a portion against machinery and equipment. Obtaining this type of financing will cost you at least a few percentage points more in terms of interest rates and fees, but it usually takes less time and requires less paperwork than fully underwriting.
Convenience stores and gas stations can also get private financing. Speed and minimal paperwork are advantages. The lower LTV (typically 50-60% maximum) and significantly higher rates and fees are disadvantages.
What’s best for everyone depends on what’s on your mind. Conventional may be the best deal if the only thing you’re looking at is the rate, provided you can get a bank or lender to do it that way. SBA is probably your best option if you want to pay as little as possible out of pocket. If the Loan to Value ratio is higher, the cost of funds may decrease. If you spend less out of pocket, the return on your investment also rises. You’ll need to look at both options to figure out which is best for you if payment is a big issue for you. Conventional financing typically has a shorter amortization period and a higher payment than SBA financing. SBA might not be the best choice for you if the penalty for early payment is most important to you. The SBA has a three-year pre-payment penalty: 5% the first year, 3% the second year, and 1% the third. Different banks and lenders will have different conventional pre-payment penalties. Additionally, check to see if the conventional loan can be assumed, as doing so may make it simpler to sell a property. If the borrower is qualified, the majority of SBA loans can be assumed. Private or stated income financing is the best option if speed is important to you, but you will probably pay higher fees and have a lower LTV.
