Calculating the Downpayment for an SBA Loan?

As you know we are sharing practical examples that occur in our office on a daily a basis to help educate on the various nuances of commercial financing. Today observation was brought about because we have a potential client that is looking at buying a couple of building as well as asking for working capital.

The clients concern was the amount of down payment he would need as well as the amortization for the various loans he is considering. Further information is needed for you to understand the analysis that we presented.

Clients Desires:

1. Purchase of Real Estate valued at 3.5 Million to be sold for 1.5 million

2. Working Capital for $700,000

So let’s discuss contribution which is a fancy way of talking about the down payment for the loan. For the Real Estate portion we will need 10% minimum contribution or $150,000. For the working capital we will need to show the client has 15% o the $700,000 or $105,000 available in equity or cash in his company. Therefore the minimum total down payment would be without costs $255,000. In actuality the down payment will be higher because it is based on total project cost.

The prospective client immediately stated that there would be enough equity in the deal without a cash injection because he was picking up the property at a “fire sale”. I then had to explain that the lender will use the purchase price or the appraised value whichever is less. So the client would have to come up with cash for the down payment.

This is a very common misconception that borrowers have. They believe that equity in the acquisition of the property is real equity. The only equity that counts is the amount of money that you are putting down, unless we are talking about a refinance where you have owned the property for over two years, then an appraised valuation is in order.

Tomorrow night we will continue to look at this deal a little further as we examine the combined payments.

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