SBA Small Business Loans

The SBA has a number of small business loans to choose from.
The SBA has a number of small business loans to choose from.

SBA Small Business Loans

Funding a business is never easy, but there are SBA small business loans available. Thankfully in the U.S. we have the Small Business Administration (SBA) for help. The SBA exists to support small businesses, and with very noticeable big businesses failing, it will become all the more important. The following are descriptions of the available SBA small business loans available.

7(A) Loan - up to $2 million

The 7(a) SBA loan is the flagship loan product available with the SBA. The most important take away is to understand the 7(a) is not lent by the SBA. The SBA guarantees a portion of the loan between 75-85% (but it has maximum guarantee amount of $1.5 million), and a SBA approved lending institution provides and administers the loan. There are plenty of banks who are "SBA approved lending institutions," that finding one will not be a problem. A 7(a) loan is between 2.25%- 2.75% plus prime. Length of loan is between 5-25 years (real assets on high end, working capital on low end).

Before running to your local bank getting a $2 million dollar loan, know that few actually get a 7(a) loan. The reason is this loan comes with plenty of requirements to complete before approval. Being that this is a government program, you know there will be a lot of paperwork and waiting for approval. Then the bank can add its terms to the loan requirements. Together (bank and SBA), the most likely reasons people do not get SBA small business loans are the lack of credit worthiness, ability to manage a business enterprise, acceptable business plan with adequate (realistic) pro forma, ability to collateralize the loan, and the coup de grace, 30% equity investment. Meaning that the business owner(s) must be able to place 30% of the required capital shown from the pro forma into the business.

Finally, another shut-off of SBA loans, the requirements are so stringent and paperwork so nightmarish that if a business would qualify for loan, the bank will just lend you the money regardless. Remember, the SBA is only guaranteeing the loan, and has plenty of back-up with a mandatory life insurance policy to cover the loan and the required collaterizing of the loan, most banks will just do away with the SBA part and fund the venture themselves (at a slightly higher rate). My belief is that many banks only get SBA approved lending status to draw people in. Then they can cull the best, and if need be push the others through the approval process if they (the business owners) have the stamina to wait it out.

504 Loan - up to $4 million

504 SBA small business loans are for long-term investments in a business- land, building, and machinery. The benefits of the 504 loan over the 7(a) are a much lower equity requirement of only 10%, below market rates, fixed rates, collateral can be the assets being financed (leaving other assets free for other financing), even soft costs like (fees, legal, appraisal, environmental) can be financed, and extended payment terms (10-20 years). There isn't much downside to this loan except the narrow scope of purpose. Therefore, if your business is looking at buying a building or new construction, the 504 loan is something you definitely want to explore.

Also, understand your local bank will probably not tell you about this program as it is below market rates. For this loan you will have to seek out a Certified Development Company (CDC) in your area.

SBA Express and Community Express Loans - up to $350,000

With a SBA Express Loan the SBA guarantees 50% of the loan amount. Interest is negotiable but may not exceed 6.5% or 4.5% above prime depending on loan amount. The SBA allows the lenders to make the eligibility requirements and requires no further paperwork. This loan product may also be used to establish revolving lines of credit, up to 7 years. Approval time is usually 36 hours (hence express). Lenders do not need to collateralize up to $25,000 and may use their own collateral policy for loans between $25,000 to $350,000.

The SBA Community Express is very similar to the Express Loan. Differences are max loan amount is $250,000, guaranteed between 75% to 85% depending on loan amount, extended repayment period, and lower rates. It is the lower interest rates that are the appeal of the Community Express Loan set at 2.25% to 2.75% above prime (there are some 1-2% additional points for smaller loans under $50,000). For the lower rate, the business must be located in a Community Express designated area and the lender must make sure the business receives "appropriate technical assistance". This is a technicality the lender will give the business and place in the loan file.

The value of these loans is the requirements are very minimal compared to the 7(a) and the approval time is quick. These are good loans to pursue for an infusion of working capital.

Microloans - up to $35,000

The SBA Microloan is unique in that the SBA gives funds to non-profits to lend out. Most are community economic development programs, and they make the credit terms and loan decisions. The max term for the loan is six years with a rate set by the lender (averaging 8% to 13%). Again the term "technical assistance" appears and the program must provide business training and technical assistance to the borrowers. The lender may also set a training completion as a requirement.

Typically, even though the loan size is small, these are not loans for quick financing. These loans are usually used for small start-ups. Think self-employed and verifiable home based businesses. They are good if a business has been operating without capital (except for revenue), have developed a track record (with projected growth), and are looking for capital improvements that will assist the business to grow.

The SBA small business loans and conventional financing are able to cover the bulk of business financial needs.

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