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What is the Small Business Administration?
The Small Business Administration (SBA) is a federal government agency that was formed in July of 1953 to provide education and guidance to small business owners. In 1954 the SBA started originating small business loans in addition to providing a government guarantee to banks to facilitate small business loan originations. The SBA created a variety of SBA loan programs to entice banks and private lenders to provide small business loans to U.S. based companies. The most popular SBA programs are SBA 7(a) Loan, SBA 504 Loan, SBA Disaster Loan, SBA Express Loan, SBA Microloan Program.
What is an SBA Loan?
An SBA Loan is a loan that’s originated by private lenders and banks but guaranteed by the Small Business Administration. Bank and non-bank lenders offset their exposure or credit risk by utilizing and SBA loan program with a government guarantee. It’s often misunderstood that the SBA lends directly to small business, when they are just providing a guarantee, or insurance on the loan.
SBA Loan programs offer attractive rates and terms but are notorious for having a long and document intensive process. Making sure that you work with the right lender or loan broker is essential to having a smooth and efficient application and closing process.
What are the different types of SBA Loans?
SBA 7(a) Loan
The SBA 7(a) Loan program is the most commonly used SBA loan program by small businesses. This is the case because the SBA 7(a) Loan program can be used for a variety of different reasons and has less restrictions and more flexibility than other SBA Programs. You can utilize the SBA 7(a) program to purchase or acquire a business, purchase or refinance equipment, partner buyouts, leasehold improved, refinancing commercial property, and for general working capital. SBA7(a) Loans range from $100,000 to $5,000,000 with interest rates from Prime + 1% to 2.75%.
SBA 504 Loan
The SBA 504 Loan program is a real estate focused program that provides small businesses with low interest rates and long repayment terms. This program is utilized by company’s looking to expand their current office, purchase a new building, acquire land for development, and for ground up construction projects. SBA 504 Loans typical range from $500,000 to $20,000,000 with rates between 4.92% to 5.22%.
SBA Disaster Loan
SBA Disaster Loans are part of SBA Disaster Relief programs that are designed to help small businesses that have experienced damage or hardship due to a natural disaster. SBA Disaster Loans can be used for leasehold improvements, to repair damage to real estate, and to replace machinery and equipment. In order to qualify for an SBA Disaster Loan you have to experience damage during the natural disaster and you must be located in a declared disaster area.
SBA Express Loan
SBA Express Loans are small business loans originated by SBA approved lenders for up to $350,000. SBA Express Loans have an expedited process due to the size of the loan and the guarantee offered by the SBA. A major benefit of SBA Express loans is that collateral is not a requirement and you can use the money for virtually any business purpose. Although this is the case, personal credit and cashflow must be strong in order to get approved. Unlike the SBA 7(a) Loan Program, SBA Express Loans can be closed and funded with just 14 days. SBA Express Loans have rates between Prime + 4.5% to 6.5% and you can borrow up to $350,000.
SBA Microloan Program
The SBA Microloan Program offers SBA loans to small businesses that are seeking less than $50,000. SBA Microloans can be used for machinery and equipment, furniture or fixtures, working capital, and inventory or supplies. Through the SBA Microloan program you can borrow from $500 to $50,000 with rates ranging from 8% to 13%.
|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%|
What can an SBA Loan be used for?
SBA Acquisition Financing
SBA Loans are frequently used for business acquisition financing. Through SBA Loan programs you can purchase a new company or a competitor. For acquisition financing the SBA requires that there is a minimum of 10% equity being used for the acquisition. Although this is the case most SBA lenders will require closer to 15-20% of equity to be used for the business acquisition financing.
SBA Debt Consolidation Loan
SBA Loans for debt consolidation is one of the most common reasons why small businesses utilize SBA loan programs. Small businesses that have short term debts, such as equipment loans or leases, lines of credit, truck loans, merchant cash advances, etc.… can refinance and stretch their debt payments over 10 years. By using an SBA Loan program for debt consolidation, you will be able to dramatically reduce your monthly debt payments. This results in significantly more cashflow for day to day operations.
SBA Equipment Refinance Loan
SBA Loans to refinance equipment enables small business owners to extend existing debt, reduce monthly payments, and improve cash flow. The cashflow impact is tremendous when you refinance equipment loan payments and stretch them over a 10-year period.
SBA Working Capital Loan
SBA Loans for working capital are frequently used by small business owners that are looking for a permanent injection of cash into their business. Traditional bank programs will require that term loans are used for specific purchases or to refinance existing debt. SBA Loan programs will allow you to inject the full loan amount into your bank account for future operations.
SBA Business Expansion Loan
SBA Loans for business expansion can help a small business accelerate growth plans without having to worry about having the cashflow to do so. By using an SBA loan to expand you can; 1. Acquire a business 2. Purchase equipment 3. Hire employees 4. Open a new location 5. Purchase commercial real estate.
SBA Partner Buyout Loan
SBA Loans to buyout an existing partner is a great way to use long term financing to own a larger percentage of your company. Similar to other reasons why small businesses would use an SBA Loan, having a 10 year term enables you to buyout a partner and be able to sustain the payments with the existing cashflow of your business.
What type of collateral is used for SBA Loans?
A wide range of collateral can be used for an SBA Loan. While different asset classes are considered, some will hold more value than others.
Machinery and Equipment
Considered a hard asset, machinery and equipment are favorable assets for SBA lenders. By taking the make, model, year, and the condition of the equipment an SBA lender will have the ability to assign a value to the equipment. 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)
A/R or accounts receivable is money that is owed to a company after a sales has been made or services have been rendered. For most SBA lenders the A/R of a company is less favorable than hard assets. 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 your clients, the payment terms that are offered, and the diversification of your 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.
Although a tangible asset that might hold value to an operating business, inventory is not always as valuable to an SBA Lender. The type of inventory, the ease of liquidation, and the location of the inventory play a major role in determining the advance rate or LTV that an SBA Lender will provide. For example, a company that manufactures its own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lenders perspective the faster and easier they can sell the inventory, the higher the value they will assign.
Commercial Real Estate
Commercial real estate or CRE is a hard asset and a great form of collateral for an SBA Loan. It’s not as liquid as equipment, A/R, or inventory, but it will provide a stable asset for an SBA lender to lend against. Unlike asset-based lending, SBA loans that have commercial real estate attached to it have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first 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 your property’s appraised value is $1,000,000 and you 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 your SBA Loan.
Residential Real Estate
Many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan. 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. The ability for the SBA to use personal residences as collateral helps make an SBA Loan more obtainable for 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.
Business owners that invest in various types of investment properties have the ability to pledge those properties as collateral for an SBA Loan. Whether the investment property is a shopping center, office building, apartment building, or single family home, it is eligible to be used as collateral.
Marketable securities are liquid assets that can quickly be turned to cash. A few examples of marketable securities are publicly traded stocks, private or public bonds, and certificates of deposits (CD’s). Like commercial real estate, marketable securities are typically used as ‘boot’ or extra collateral to help a borrower gain additional liquidity. Advance rates for securities tend to range from 50% to 95%, which is dependent on the type of security.
What documents are needed to get approved for an SBA Loan?
*The below forms are necessary to process an SBA Loan Application, but additional documentation will be required.
Downloadable SBA Forms
SBA 7(a) Loan Application Documents – SBA 504 Loan Application Documents – SBA Disaster Loan Application Documents – SBA Express Loan Application Documents – SBA Microloan Loan Application Documents
SBA Form 1919
SBA Form 1920
Profit and Loss Statements (prior 3 years)
Current Balance Sheet
Current A/R Aging Report
Current A/P Aging Report
Business Debt Schedule
Complete Business Plan
2 Years of Business Projections
Speak with a SMB Lending Expert to determine what product is the best fit for you. SMB Compass’s simple and secure online application can be completed in a matter of minutes, with no obligations and no impact on your personal credit!
Once your application is complete we will review the rates, terms, and any questions you have about your loan approval. We will only move forward when all of your questions are answered!
Once you accept your approval and provide closing documents we will review your terms again to make sure that all your questions are answered. Your loan will then be closed and funded within 24 hours!
How long does the SBA Loan application take?
The application process for an SBA Loan is going to vary based on the SBA program being used and how organized your financial information is. SBA Loans can take anywhere from 14 days to as long as 6 months, but the delay normally comes from information that is not readily available by the business owner. If you are organized and have your financials, insurance documentation, tax returns, and other relevant business information on hand, the process can be much faster.
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