Experiential Hospitality Development Financing with SBA and USDA loans

The federally backed SBA and USDA small business loan programs provide long-term financing for 25 years for campgrounds, RV parks, glamping resorts, B&Bs, independent inns, and other experiential hospitality businesses.  When a small business project involves new construction for business startup or expansion, banks will often provide one loan for the land purchase, another loan for the construction, and a third loan for the mini permanent financing.  The mini permanent financing may have a 25-year amortization; however, it has a balloon feature where the entire loan balance is due in 3, 5, or 10 years.  An SBA or USDA loan can combine financing for all these phases in one long-term loan.

One of the advantages of SBA and USDA financing is the long-term, permanent financing terms.  The borrower is not faced with renewal risk when a balloon balance comes due every few years.  A special feature of the SBA 7(a) loan program is the limited prepayment penalty time frame of only 3 years.  Many SBA borrowers will use SBA financing for the construction and stabilization of the business for the first 3 years, and then they refinance the loan and lock in favorable long-term fixed rate financing based upon the proven stabilized earnings of the business.

The limitation of the SBA 7(a) loan program is its maximum $5 million loans per borrower.  The USDA B&I (Business & Industry) loan program is available for up to $25 million per project.  USDA allows participating banks to negotiate prepayment penalties, so there is an inverse relationship with the interest rate when negotiating the prepayment penalties for the loan.  If the borrower plans to refinance the USDA loan after earnings are stabilized, they may want to negotiate a shorter prepayment penalty time frame.

Both SBA and USDA financing make sense when the borrower is conducting new construction for a startup business or for a major expansion of an existing business.  All aspects of the construction, development, and business startup costs for either may be financed with the bank having a first lien on the property.  In these cases, lenders usually rely upon financial projections to justify repayment of the loan.  When historical revenues have been nonexistent or insufficient to repay the startup or business expansion loan, the risk to the lender is much greater, and the partial government guarantee on the loan allows the lender to offer more liberal underwriting guidelines for the loan request.  With stabilized earnings, many properties will graduate to refinancing with more favorable interest rates, and they can use the SBA or USDA loan program for their next business startup or major expansion project which does not yet have stabilized earnings.