Loans can be a daunting and scary part of life, but with so much jargon mixed with salespeople desperate for your cash, how can you know what's up or down? Here we are going to explain what an SBA 7(A) loan is, what an assumable loan is and whether SBA 7(A)’s can be considered assumable.
Everything will be explained in normal terms, so you don’t have to google every third word we use. We want you to feel confident with your finances so that you can start your loan journey level-headed.
What Is An SBA 7(A) Loan?
SBA stands for Small Business Administration. Small Business Administration is a United States of America government agency that gives out loans to small businesses and entrepreneurs to help them grow or simply start their own business.
The 7(A) is one of the programs which SBA uses, and it works best for people who need to buy real estate like office rooms or buildings. Some people use it to purchase business equipment like salon chairs and paint supplies, but it can also be used to refinance current business debt.
Refinancing is when you pay off your existing debt with someone else through a new loan. The new loan should lower your interest.
The maximum you can borrow with an SBA 7(A) loan is $5 million.
To be eligible for this loan, you need to be a small business that operates for profit, which means you aren’t a charity. You need to do business in the United States. You need to show that you have used your own personal assets before getting to this point, meaning you may have sold your car or reduced your savings accounts.
You need to explain why you need a loan and that the business will be successful for it. And lastly, you cannot have any other debts with the U.S government.
The interest on SBA 7(A) loans is consistent, which means that your monthly payments won’t change. This should allow you to be prepared for your payments.
What is an Assumable Loan?
An assumable loan is a loan that can be bought by a “purchaser.” The “purchaser” would then make payments towards the loan with the same interest rate and the same length of time left by the original owner.
If you use the loan to pay for the house, like a mortgage, then the purchaser would own the home and can pay off the loan at the same low rate that you were paying and with the same length of time you had left the debt in.
Not all loans are able to be assumed, and there is a bit of history around why. In the early 1980s, most mortgage loans were assumable as long as the new purchase paid a fee. This was not a problem until the banking crisis hit and interest rates started to become very high.
Originally mortgage loans were as low as 6 or 7 percent, but with this interest boom, the percentage grew to 20.
This meant that homeowners didn’t want to get new mortgages anymore as the 20% interest was too high. Instead, they started to purchase assumable loan mortgages to keep the same 7% as the previous owners.
Of course, this was a great way for new owners to get around the hike in payments, but the banks were missing out on money. Banks began to crash and needed government bailouts to stay afloat. This was costing the government and the banks too much money.
A new clause was introduced to most loans called “Due on Sale.” This clause meant that when a house was sold, the mortgage loan was due to be paid on the sale date, therefore stopping the purchases from keeping the low interest rate as they would have to get a whole new mortgage.
Many states (led by California) argued that this clause went against consumer rights, however, the government was losing so much money that they let the clause be introduced anyway.
Nowadays, assumable loans are rare, and if a purchaser wanted to buy an assumable loan, they would need to meet a lot of the bank's requirements before any discussions were made.
Are SBA 7(A) Loans Assumable?
So, after all that, are SBA 7(A) loans assumable? The answer is yes. However, even though it is possible to sell your business through this method, the process is complex.
The first thing you will need to factor in is the original SBA eligibility guidelines. The new borrower will need to pass this eligibility test just like you did. They also need to have enough financial strength and business experience to convince SBA that defaulting is unlikely.
Unlike your original eligibility guidelines, there are a couple more requirements that the new borrower will have to fit into. The new purchases will need to be the primary owners of the business, and they must have either the same amount of experience as you or even more experience.
Their credit score must be Good, which means it rates at 680 or higher. This new business person must also be able to show financial strength to repay the whole loan; they can do this through a collateral item like another house worth the same amount of money which cannot be sold during the assumption process.
Finally, these new agreements will have a “Due on Sale or Death” clause attached to them to prevent the loan from being assumed for a second time.