SBA Loans
17. SBA Loan: Finance Equipment, Inventory, Working Capital, Real Estate
UPDATE: March 2009
Under the Obama Administration, the Treasury Department will purchase up to $15 billion in securities backed by SBA loans in an effort to unfreeze the secondary market for SBA loans.
This should increase SBA lending to small businesses by enabling lenders to sell their existing loans on the secondary market. This will free up capital to make new loans.
President Obama also announced plans for implementing the SBA-related provisions included in the economic stimulus bill. The SBA will now guarantee up to 90-percent of each 7(a) loan made by private-sector lenders. This is an increase from the normal 75-percent to 85-percent guarantee. This higher guarantee will encourage lenders to make more SBA loans, because they will have more protection against possible loan losses.
In addition, upfront fees on 7(a) loans that lenders pass along to borrowers also will be temporarily eliminated, as will fees on 504 loans.
These new initiatives will be a great tool to make more money available for small business owners.
Overview
While the SBA Small Business Administration Department of the United States offers numerous loan programs to help small business owners, I will focus on two widely used real estate loans. Note: the SBA does not provide the loans to borrowers directly. Instead, the SBA guarantees the loan for the local lenders who fund the loans.
These two loan programs are the 7(a) Loan Guaranty and the Certified Development Company (CDC), a 504 Loan Program.
Types of businesses eligible The business must operate for profit, be engaged in, or propose to do business in the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets.
Size of eligible business The definition of a small business actually varies from industry to industry to adequately reflect industry differences. The SBA has developed size standards defined by specific SIC codes. The lender will discuss these with you.
Program Basic 7(a) Loan Guaranty
This is the primary SBA business loan program to help small businesses obtain a loan when they might not be eligible for business loans through normal lending channels. It is a very flexible program for a variety of general business purposes.
Loan funds can be used for:
Working capital
Machinery and equipment
Furniture and fixtures
Land and building (including purchase, renovation and new construction)
Leasehold improvements
Debt refinancing (under special conditions)
Loan Features:
The maximum loan amount is $2 milion. However, the SBA only guarantees a maximum of 75% on loan amounts of up to $1 milion. For amounts of $150,000 or less, it guarantees a maximum of 85% of the loan amount.
Fixed and variable rates available.
Loan maturity is up to 7 years for working capital.
Loan maturity is up to 25 years for fixed assets.
SBA charges an annual servicing fee of about .50% on the amount guaranteed. It also charges a sliding-scale fee on new loans, ranging from 1% to 3.5% of the guaranteed portion of the loan amount.
Program Certified Development Company (CDC), a SBA 504 Loan Program
This program provides long-term, fixed-rate loans to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a local lender with a senior loan, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower.
Three other SBA programs worthy of mention
1. LowDoc loan program The maximum loan amount is $150,000. This SBA commercial loan program shortens the application process to just one 2-sided document filled out between you and the lender. The SBA promises an answer within 36 hours. It guarantees up to 85% of the loan amount. Interest rate pricing is similar to that of the 7(a) loan-guarantee program.
2. SBA Express loan program The maximum loan amount is $250,000. The program also lets the borrower request an unsecured credit line of $25,000. The SBA has a streamlined approval process fro guarantees up to 50% of the loan amount.
3. CAPLines This program is actually 5 working capital loan programs that provide credit lines to small businesses. The maximum guaranty is for $1 million. Since the SBA guarantees 75% of the loan amount, the maximum implied loan amount is $1.33 million. Credit lines are offered for terms of up to 5 years.
| Highlights of Two Popular Programs for Business Owners | ||
| Loan Type | SBA Express | 504 Loan |
| Description | Uses lender documentation; minimal SBA documents required | Long-term fixed asset financing |
| Max loan amt | $150,000 | Total project cost up to $5 million (combination of bank, SBA and borrower funds) |
| Use of funds | Working capital, inventory or equipment | Real estate, land, long-term equipment, construction or renovation |
| Maturity | Two options: 3-year revolving line of credit, convertible to 4-year term loan; or 7-year term loan | 10 to 20 years |
| Max interest rate | Not to exceed
6.5% over the prime lending rate Fixed or variable rates |
Current market
rate for 5- and 1--year treasury issued plus increment Fixed or variable rates |
Not all banks who offer SBA-guaranteed loans are created equal
While most banks, as well as certain commercial finance companies, offer SBA loans, there are two specialized categories you should know about...
Certified Lenders and Preferred Lenders
Both of these types of lenders have entered into contractual relationships with the SBA and officially participated in the Certified Lender/Partner Lender Programs (CLP/PLP).
About 850 lenders qualify for the Certified Lender Program representing about 4% of all SBA business-loan guarantees. Since the certified bank does much of the SBA's work, the agency offers quick turn times of 3 business days for processing the completed application.
About 450 lenders qualify for the Preferred Lender Program representing about 21% of the SBA loans. Preferred lenders have full lending authority and as a result can offer 1-day turn times on completed applications.
Get More Information and Help:
# For SBA 7A loans, use the Apply Now! button below
# For other SBA programs including the SBA 504, LowDoc, Express and CAPLines, a local Community Business Lending Bank that processes SBA loans, will be your best source of funds.
