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What is the Small Business Administration?
The Small Business Administration (SBA) is a federal government agency, formed in July 1953 with the purpose of providing education and guidance to support and encourage small business owners. In 1954 the SBA solidified its position as a premier resource for small businesses when it began originating small business loans and providing government guarantees to banks for facilitating small business loan originations. The SBA is a cabinet-level agency with the sole purpose of aiding small business owners. Today, SBA loans are issued by banks or other lenders and are guaranteed by the SBA and its agencies.
The SBA created a variety of SBA loan programs to entice banks and private lenders to provide small business loans to US-based companies. The most popular SBA programs are SBA 7(a) Loan, SBA 504 Loan, SBA Disaster Loan, SBA Express Loan, SBA Microloan Program. Because the loans are guaranteed by the government, lenders are able to offer these programs to small business owners with more flexible terms and lower interest rates compared to traditional business loans and lenders.
What is an SBA Loan?
SBA Loan programs offer attractive rates and terms, but are notorious for having a long and document-intensive process. Because these are long term loans with guarantees, every dollar must be earmarked and the purpose of the funds must be documented at every step. This process, to identify clearly how the money will be spent, takes a lot of time. Making sure that a small business owner works with the right lender or loan broker is essential to having a smooth and efficient application and closing process.
Small business owners often prefer SBA business loans over traditional financing options because the nature of their company and their needs fit the SBA loan requirements. Especially with the ease of accessing information in today’s modern age, it is easy for small business owners to browse the Internet and learn about the different SBA loan programs and compare different loan products offered by different lenders. Some online resources offer an SBA loan calculator or other innovative tools to teach business owners how to apply for an SBA loan or to understand their qualifications or restrictions and compare the fit of different types of loans for their company. From learning about a first SBA startup loan or applying for additional SBA business loans to expand or develop an existing small business, there is plenty of information available to learn about and find an SBA loan program and lender that will work for any small business.
What are the different types of SBA Loans?
SBA 7(a) Loan
SBA 504 Loan
SBA Disaster Loan
SBA Express Loan
SBA Microloan Program
|SBA 7(a) Loan Amounts||SBA 7(a) Loan Terms||SBA 7(a) Loan Rates|
|$100,000 to $5,000,000||7 to 25 years||Prime + 1% to 2.75%|
|SBA 504 Loan Amounts||SBA 504 Loan Terms||SBA 504 Loan Rates|
|$500,000 to $20,000,000||10 to 30 years||4.92% to 5.22%|
|SBA Disaster Loan Amounts||SBA Disaster Loan Terms||SBA Disaster Loan Rates|
|Up to $2,000,000||Up to 30 years||4% to 8%|
|SBA Express Loan Amounts||SBA Express Loan Terms||SBA Express Loan Rates|
|Up to $350,000||7 to 35 years||Prime + 4.5% to 6.5%|
|SBA Microloan Amounts||SBA Microloan Terms||SBA Microloan Rates|
|$500 to $50,000||Up to 6 years||8% to 13%|
How do SBA Loans Work?
Finding the right SBA-approved lender is important in guaranteeing a smooth process from start to finish. Unlike other traditional loans, the documentation and financial information required for authorization in the SBA loan process is demanding, and sometimes the process to determine eligibility can take some time, which can frustrate some small business owners. This means that finding an educated lender that works well and can communicate makes for a much easier process for business owners. Especially if a business owner is new to SBA loans or small business loans in general, they will want to find a lender that can help them learn the ins and outs of the different programs available. The SBA itself, as well as their partners, also offer courses and training programs to help small business owners put together a comprehensive plan that will aid in the application process and throughout the SBA loan program.
Small business owners often ask how to apply for a SBA loan or how to qualify for an SBA loan – because these are longer term loans, there is a deeper background and credit check compared to other small business loans. When looking into how to get an SBA loan, business owners need to gather documentation and evidence that their small business will be alive and healthy for over 10 years and will need to show collateral that can secure the loan. Business owners will also need to provide their personal identification, their business certificate or license, proof that they are the owner of the small business, the business financials and any current financial projects, profits statements, loss statements, tax returns for the last two years for the small business and for the business owner’s personal taxes, and any history of past loan decisions or applications. If a small business can provide all of this information and can demonstrate strong health, has a good borrowing history, can demonstrate good credit, present a profitable business plan and show that they are making money and will be able to pay off the loan, then they should be ready to apply for an SBA Loan.
What can an SBA Loan be used for?
SBA Acquisition Financing
SBA Debt Consolidation Loan
SBA Equipment Refinance Loan
SBA Working Capital Loan
SBA Business Expansion Loan
SBA Partner Buyout Loan
Benefits of SBA Loans
One of the biggest benefits of SBA loans is that the loans are secured, which provides a major incentive for lenders to offer SBA loans to small business owners. SBA agencies guarantee a majority of the loan amount for the lender, which reduces their risk and allows them to continue supporting small business owners. This makes the likelihood of finding a lender and successfully applying for an SBA Loan higher, as the risk goes down for the lenders.
Downfalls of SBA Loans
Additionally, while the SBA offers some flexibility in the purposes that funds can be used for, there are some restrictions on the use of funds that might come up during the application process. Because the funds must be accounted for and well-documented, business owners must demonstrate that the funds will not be used on restricted expenses.
What type of collateral is used for SBA Loans?
A wide range of collateral can be used to secure an SBA Loan. While different asset classes are considered, some will hold more value than others. Some of the types of collateral that can be used for SBA loans are: machinery and equipment; accounts receivable; inventory; commercial real estate; residential real estate; investment properties; and marketable securities.
Machinery and Equipment
For most SBA loans, the typical advance rates or loan-to-value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that an SBA lender will provide availability based on what they would be able to sell the equipment for in the event of a default.
Accounts Receivable (A/R)
For most SBA lenders, the A/R that a company has to offer is not as favorable as hard assets, like machinery or equipment. The typical loan-to-value (LTV) for A/R is 20% of the outstanding accounts receivable. This can vary based on the credit quality of the applying business’s clients, the payment terms that are offered, and the diversification of their client base. SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender to provide a revolving line of credit in addition to an SBA Loan.
Commercial Real Estate
Additionally, unlike asset-based lending, SBA loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. SBA Loans can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan.
Residential Real Estate
With SBA lenders, residential real estate can be used for collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make SBA Loans more obtainable for more small business owners. Most home-owners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.