Identifying The Right SBA Loan Program

December 8, 2016 by Dennis R. Baranowski, Esq.

The U.S. Small Business Administration (SBA) is an independent enterprise developed by the government to promote and protect small businesses across the nation. The agency was created in 1953 through the Small Business Act, and has since grown into an organization that primarily provides help to small businesses through the promotion of business loans and the award of government contracts and grants.

Though the SBA does not directly lend money, it assists small businesses development through guaranteeing or purchasing loans made to businesses through the private lending markets. As of 2015, the SBA held over $118 billion in its loan portfolio. The agency promotes loans designed specifically for small businesses, such as general business loans, disaster loans, microloan (short-term loans), as well as property and equipment purchase loans. Loans are made under SBA guidelines through its network of participating lenders and guaranteed by the government.

The administration provides regulatory oversight for loans it insures to control fraud and to be sure money is getting out to small businesses through Preferred Lenders, as well as other small business lenders. The loan programs offer competitive interest rates, as the SBA controls the amount of spread a bank can make on the loan origination. Businesses can also choose from a variety of repayment terms.

SBA guaranteed loans fall into four different loan program categories:

General Small Business Loans (7(a))

The SBA provides these general loans based on the requirements of certain aspects of the small business and its principals. Loan eligibility guidelines are based on where a company operates, the function of the firm, income-generating functions, and the “character” of its ownership. The SBA seems to concentrate more on what businesses do not qualify, as to which qualify, but there are certain universal requirements to obtaining credit. The 7(a) Loan Program is considered a “working capital” loan for businesses that may not be able to obtain traditional commercial financing, and typically offers a seven-year term.

To be eligible for a general loan, a business must be:

  • Be a for profit enterprise
  • Be defined by the SBA as a “small business”
  • Conduct Business in the United States
  • Have reasonable equity invested in the business
  • Have personal “skin in the game”
  • Demonstrate a need for financing for “business purposes”
  • No outstanding debt delinquencies

Microloan Program

The Microloan program was designed to offer relative short-term financing to companies that need working capital, inventory or supplies, furniture, or machinery and equipment. The loan proceeds cannot be used to purchase real estate or repay debts. The loan term will not be longer than six years, and typically incurs an interest rate of between 8 to 13 percent, based on lender requirements.

Disaster Loans

The SBA has created a disaster loan program to assist with businesses, homeowners, and non-profit organizations that have been affected by a natural disaster. The program provides funds for repair or replacement of property damaged or destroyed during a disaster, including real estate, personal property, machinery and equipment, and inventory or other business assets. Under the terms of the loan guarantee, the SBA also allows for leasehold improvements for up to 20% of the cost of the damage, as well as coverage of some uninsured physical damage.

Real Estate & Equipment Loans (CDC/504)

The CDC/504 SBA loan program is designed to provide funding for major expenditures associated with equipment purchase or real estate financing. Loans for real estate can have a loan term of up to 25 years, and up to 10 years for equipment loans.

To obtain funding, a business must:

  • Operate a for-profit company
  • Conduct business in the United States
  • Tangible net worth under $15 million and an average income of less than $5 million
  • Conduct no business involving speculation of real estate
  • Be an eligible SBA business under agency guidelines
  • Comply with Use of Proceeds
  • Ability to Repay loan from company profits
  • Feasible business plan

The Good

If your business has inadequate equity or been in business for a relatively short period of time, you may benefit from the flexibility that comes with an SBA loan. The federal guarantee allows lenders leeway in determining which businesses are approved, and how long the term will be. An SBA loan is a good fit for a company seeking quick access to capital, with a lower rate and longer repayment period.

The Bad

The SBA has been working with lending partners to streamline and improve some aspects of the application process. However, the main complaint businesses have with SBA loan programs is the amount of paperwork a company must provide. The 7(a) loan requires that a company prove up revenue streams in order to qualify. The addition of the SBA Express Program has sped up the process, although it only guarantees half the amount from a standard 7(a) loan. This does not mean that you will not be able to obtain the remaining amount from the lending bank, but it makes it quite a bit harder when the government is not standing behind those funds.

Finding A Lender

Most of the major national association banks offer SBA loans to their customers, but you can also find a list of the most active lenders on the SBA website. If you live in a small-market area, many commercial business banks and federally insured institutions also participate in the SBA program. While shopping around for the right lender, ask if they participate in Preferred Lender Program. This program allows the local bank or lender to make most of the underwriting decisions associated with approving the loan, and can usually assist a business area with overcoming trouble areas.

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