Calculating the Term of an SBA Loan

It’s not as easy as you think!

Continuing with last night’s blog, we will now discuss the term of the loan. The term of the loan is important for a couple of reasons. The first and obvious one is when the loan will be paid off. All SBA Loans are fully amortizing loans so at the end of the term the balance is zero. But more importantly as to when the loan is paid off is the calculation of the payments.

The longer the amortization the lower the payments, but what happens when you have two purposes for as in our example from last night. The real estate for 1.5 million and the working capital for $700,000. If these were treated as two separate loans the real estate would be 1.5 million less 10% for the equity contribution would be amortized at 25 years, while the business opportunity would require 15% equity injection would be amortized for 7 years.

Let me put this in a perspective which is perfectly clear to demonstrate the true effect on the payment with varying amortization periods

1. Real Estate $1,500,000 – 10% equity injection or $1,350,000 loan amount payment =$8,700.00 approximately at 6.0% amortize for 25 years

2. Business Opportunity $700,000 – 15% equity injection or $595,000 loan amount = $8,700.00 approximately at 6.0% for 7 years

The same payment but the difference in loan amounts is almost double. The reason for this is the amount of loan periods that payment are to be made over 300 or 12 months time 25 years, versus 84 or 12 months for 7 years.

So, together the two loans would be approximately $17,500.00 per month for the first 7 years then $8,700 continuing for the remaining 18 years assuming interest rates don’t adjust for the loan period which is highly unlikely. But we will save that for a further blog.

However with the approval of the new SBA SOP effective October 1, 2009, for any combined loan the term of the entire loan is dictated by the type of the largest portion of the loan. In our example the real estate loan is much greater than the business opportunity so the entire loan of $1,945,000 is now amortized over 25 years for a loan payment amount of approximately $12,500.00 per month a sizable savings from $17,500.00 per month.

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