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What is the LTC Ratio for the SBA 7(a) Loan?
If your business plans include taking out a commercial real estate construction loan , you’ll want to familiarize yourself with the Loan to Cost (LTC) ratio and how it impacts your financing.
If your business plans include taking out a commercial real estate construction loan, you’ll want to familiarize yourself with the Loan to Cost (LTC) ratio and how it impacts your financing. Lenders use the Loan-to-Cost formula as a means to determine how much risk they are taking on when underwriting a commercial construction loan.
Factors that Make up the LTC Ratio
The loan-to-cost ratio is determined by taking the total amount you want to borrow for your construction loan and dividing it by the total acquisition, construction/renovation costs.
The mathematical formula looks like this:
LTC Ratio = Desired Loan Amount/Construction Budget
The LTC ratio is only used to calculate funding during the construction phase of the project.
How Lenders Determine the Maximum Amount You Can Borrow
A commercial real estate construction loan is similar to other types of financing a business owner would seek from a lender. You apply for the amount of funds you need for your project; the lender expects you to have a certain personal “stake” in the project.
You can expect the bank to require you (or your business) to contribute 20 percent to the project. If you are looking for financing above that level, it may be more challenging to find financing and you will likely pay a higher interest rate.
Borrowing Funds for Acquisition and Construction or Renovation
You may wish to approach a lender who handles commercial financing for funds for one of the following plans:
You want to buy land and then build on it to your specification; or
You wish to buy an existing property and renovate it to suit your needs
What is the Loan-to-Cost (LTC) ratio for an SBA 7(a) loan?
The Loan-to-Cost (LTC) ratio for an SBA 7(a) loan is determined by taking the total amount you want to borrow for your construction loan and dividing it by the total acquisition, construction/renovation costs. The mathematical formula looks like this:
LTC Ratio = Desired Loan Amount / Construction Budget The LTC ratio is only used to calculate funding during the construction phase of the project. To learn more about the SBA 7(a) loan program or to get a free quote, simply fill out the form and one of our friendly SBA loan experts will get in touch!
What are the eligibility requirements for an SBA 7(a) loan?
The eligibility requirements for an SBA 7(a) loan include:
- The business must meet the SBA's size standards for its particular industry.
- The business must have fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years.
- The business must physically be based in the U.S. and operate within the U.S. and its territories.
- The business must operate for profit.
- Business owners must first have used other sources of financing, including personal funds, in order to qualify.
- Businesses must not be involved in lending, real estate, or speculation.
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
What are the maximum loan amounts for an SBA 7(a) loan?
The maximum loan amount for an SBA 7(a) loan is $5 million. The loan has no minimum, which is good news for small businesses. For example, in 2010, a small business in eastern Missouri obtained a $5,000 SBA 7(a) loan.
If you need more than the max amount of $5 million, the SBA 504 program or another loan is a better fit.
What are the interest rates for an SBA 7(a) loan?
The interest rates for an SBA 7(a) loan depend on the amount of the loan and the maturity of the loan. For loans with a maturity of less than 7 years, the interest rate is the prime rate plus 4.25% for loans of $25,000 or less, 3.25% for loans between $25,001 and $50,000, and 2.25% for loans of $50,001 and up. For loans with a maturity of more than 7 years, the interest rate is the prime rate plus 4.75% for loans of $25,000 or less, 3.75% for loans between $25,001 and $50,000, and 2.75% for loans of $50,001 and up. The Current prime rate is 8% as of May 2023.
What are the repayment terms for an SBA 7(a) loan?
The repayment terms for an SBA 7(a) loan vary depending on the type of loan. For commercial real estate loans, the loan term is up to 25 years. For equipment loans, the loan term is up to 10 years. For working capital loans, the loan term is also up to 10 years.
Learn more: Understanding How the SBA Guarantees Loans
The lender will consider the cost of acquisition and the fixed costs of completing construction and renovations when deciding whether to lend you the money. The LTC ratio is only used to determine whether the loan makes sense from the point of view of financing the construction.
It doesn’t look at the amount of income your commercial property may be generating from tenants once the construction or renovations are completed. If your business isn’t leasing space to tenants, any income you are generating through your own operations isn’t included in the calculations, either. This calculation is strictly focused on whether the numbers for paying for the construction make sense from the lender’s point of view.
How to Increase LTC Ratio in your Favor
Before you apply for financing, let’s take a look at how you can get approved for the highest possible LTC.
Present Yourself as a Desirable Borrower
In order to qualify for an SBA construction loan, put yourself in the shoes of the lender: Why would a bank want to lend you the funds you are requesting? With that goal in mind, make sure that your business and personal credit records are clean.
You’ll also want to show the lender that you and your management team have business experience to draw on and a history of meeting your expenses on time.
Talk up your Choice of Location
Tell your lender exactly why you’re excited about buying that property and building on it or renovating it for your business. Your bank needs to understand why this is a quality location for you to grow your business and how the construction/renovation plans can help you get there. Then you can get into the details of your budget. If your lender can’t see the bigger picture first, you won’t be able to get them on board with how much you need to spend to make it happen.