In today's fast-paced entrepreneurial landscape, understanding the financial tools available can set you apart from the competition. As a business ownership coach, I often encounter aspiring entrepreneurs who are eager to learn how to leverage financing options to build long-term wealth. One of the most effective strategies involves utilizing the Small Business Administration (SBA) loans, particularly the SBA 7A and 504 loans. In this article, we will explore these funding options and reveal some lesser-known secrets that top entrepreneurs use to maximize their financial potential.
The Triangle Method & Funding Stack Secrets
At the core of our strategy lies the triangle method, which emphasizes three key components: owning a business, owning the building, and structuring deals creatively. This method is crucial for building equity, generating passive income, and keeping more of what you earn. In a world where 10,000 baby boomers retire every day, many of whom own profitable businesses, the opportunity for savvy entrepreneurs is ripe for the taking.
Understanding the SBA 7A Loan
The SBA 7A loan is often referred to as the “Swiss Army knife” of business financing. It offers incredible flexibility for entrepreneurs looking to buy a business or franchise, roll in working capital, add equipment, or even finance partner buyouts and refinances. With down payments ranging from 10% to 20% and terms extending up to 25 years, this loan can be a game changer.
One of the significant advantages of the SBA 7A is working with Preferred Lenders (PLPs). These lenders can underwrite loans in-house, expediting the process significantly. However, it's essential to note that not all banks are created equal. The appetite for different types of loans varies, and navigating this landscape can be challenging without the right guidance.
Franchise & Startup SBA Lending Explained
Many entrepreneurs mistakenly believe that all SBA lenders fund startups or franchises, but this is not always the case. The key to securing financing lies in how you structure your deal. Creative deal structuring can involve seller financing, using a Rollover as Business Startups (ROBS) program, or leveraging existing retirement accounts for equity injections. In addition, a solid business plan and financial models are indispensable for increasing your chances of approval.
The SBA 504: Build Wealth with Real Estate
If you're looking to own the building that your business operates from, the SBA 504 loan is your cheat code. This loan offers fixed 25-year terms at below-market rates with as little as 10% down. The beauty of the 504 loan is that it allows you to wrap in renovations, making it an excellent option for those looking to expand or upgrade their facilities.
By combining the SBA 504 with the SBA 7A, you can create a powerful financial strategy. For example, you can buy a business that needs a home and then purchase the building that becomes its headquarters. By renting out unused space, you can have your tenants cover your SBA loan payments.
Business Hacking 101: Own the Biz & the Building
Business hacking is akin to house hacking but tailored for entrepreneurs. The concept is simple: if you have a cash-flowing business, you can potentially secure up to 100% financing for an expansion, provided your business occupies at least 51% of the space. This strategy allows you to build equity while generating passive income.
Consider the example of Joe, who buys a million-dollar auto repair business with 90% financing and puts down only 10%. He then purchases an $800,000 building with an SBA 504 loan. By renting out two units to local businesses for $4,000 a month, Joe not only covers his debt payments but also positions himself for significant cash flow and tax benefits.
Leveraging USDA B&I Loans for Rural Opportunities
For those operating in rural areas, the USDA B&I loan presents unique opportunities. These loans can fund various business types, including storage facilities, assisted living centers, and even real estate acquisitions. With a maximum funding limit of $25 million, USDA loans are ideal for businesses in communities with populations of less than 50,000.
Unlike SBA loans, which require owner-occupied businesses, USDA loans can be used for investment purposes. This flexibility allows entrepreneurs to explore larger rural deals that might not be available through traditional financing channels.
Creative Structuring: Seller Carry & Investor Partners
One of the best-kept secrets in financing is the power of creative structuring. By combining SBA loans with seller carrybacks, entrepreneurs can significantly reduce their cash out-of-pocket. For instance, if you secure 90% bank financing and negotiate a 5% seller carryback, you only need to come up with 5% of the purchase price, which could potentially come from an investor partner.
This creative approach allows you to close million-dollar deals with minimal upfront investment. Additionally, pairing the SBA 504 for real estate with the SBA 7A for operational expenses creates a comprehensive financing package that maximizes your leverage.
Lender Requirements: Clean Credit & Solid Projections
When applying for SBA loans, lenders typically look for several key factors. Clean credit, ideally 680 or better, is essential. A solid down payment, realistic projections, and relevant experience also play crucial roles in securing financing. For those without direct experience, investing in a franchise can often make financing easier.
Having existing cash flow can serve as “jet fuel” for your application, making it easier to gain approval and secure favorable terms.
Why You Need a Deal Structuring Pro
Having a deal structuring professional in your corner can make all the difference. With over 27 years of experience in lending and having closed over 1,500 deals, I understand the nuances of the lending landscape. I can help you navigate the complexities of SBA financing, ensuring that your application is submitted with the best chance of success.
Staying on top of changing guidelines is crucial; I don't get paid unless your deal closes, which means your success is my priority. Whether you need assistance with structuring your deal or understanding the latest SBA requirements, I'm here to help.
Consultation for SBA Financing Options
If you're ready to explore your financing options, I invite you to book a consultation. Whether you're looking to acquire a business, purchase real estate, or simply want to learn more about SBA financing, my team and I are here to guide you through the process. Visit bookwithbeau.com to schedule a call or text me at (925) 940-4133.
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Final Thoughts
Understanding and utilizing SBA loans can significantly impact your entrepreneurial journey. By mastering the triangle method and leveraging various financing options like the SBA 7A and 504 loans, you can build wealth, generate passive income, and secure your financial future. Remember, the journey to financial freedom starts with the right knowledge and guidance.
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