Obtaining SBA Loans for Your Small Business

Qualifying for a bank loan for your small business is not as easy as it once was. Banks have become more conservative and have tightened their lending standards. It’s understandable that banks are more cautious today than they were before the recession began a few years ago – they suffered big losses when homeowners couldn’t pay their mortgages. Businesses struggled and many business owners wound up defaulting on their bank loans

The Small Business Administration (SBA) makes it possible for many small businesses to obtain the working capital they need from a bank by guaranteeing a substantial portion of the loan. Banks that would otherwise not extend credit because of the perceived risk, are more willing to lend a government agency assumes most of the risk.

The SBA offers a number of different loan programs to small businesses. The most popular of the available options is the SBA 7(a) General Business Loan. Other programs that may be available to help fund a small business include the CDC 504 Real Estate and Equipment loan program and the Microloan program.

The SBA does not loan money directly to a small business. Instead, they partner with banks or other financial institutions that choose to participate in SBA financing. The top 100 SBA 7(a) lender banks combine to lend billions of dollars each year to small businesses. Many smaller banks also participate in SBA financing and recently, Credit Unions came to an agreement to offer SBA loans.

What to Expect when you Apply for an SBA Loan

Be prepared to complete a lengthy application and provide a number of different documents. Just like trying to qualify for Medicaid, Social Security Disability insurance or any other government assistance program, you have to go through a process. Any delay in providing all of the documentation required will also delay the approval of your loan. Each bank is different, but generally you can expect the loan to close within 60-90 days.

SBA 7(a) General Business Loans

It’s not as hard to qualify for an SBA loan as you might think. To be eligible for the loan program your must run a for-profit business, meet the SBA definition of a “small business” and do business in the United States. You must have a financial stake (equity) in your company, show that you have exhausted other sources of capital, explain the reason for the loan, and the money must be used for a sound business purpose. Finally, you can’t be delinquent or in default on any other government loans you may have.

You can use the funds for almost any sound business reason. The proceeds of the loan can be applied toward the purchase of inventory, equipment, supplies and materials. You can pay vendors and other creditors or you could expand your building. There are many other ways the money can be spent and a few ways it cannot be spent. For example, you can’t use the funds to reimburse an owner of the business for money he put into the business.

Loans can be made up to a maximum amount of $5,000,000. There are no fees on loans under $150,000, but there are fees on the guaranteed portion of loans over $150,000. Fees can range from 0.25-3.75% depending upon the term and amount of the loan.

Interest on a loan is calculated by using an approved base rate (such as a published prime rate) and adding a spread of 2.25-2.75 percent, depending upon maturity. On loans less than $50,000, the spread may be higher.

CDC/504 Real Estate and Equipment Loans

Eligibility rules are similar to SBA 7(a) loans. The maximum amount you can borrow is based on how the proceeds of the loan will be used.

  • Meeting a job creation or community development goal: $5,000,000
  • Meeting public policy goals: $5,000,000 – $5,500,000
  • Being categorized as a small manufacturer: $4,000,000

Loans require collateral, can have maturities as long as 20 years, and fees are roughly 3.0%. Interest rates are a few points above the 5 or 10-year U.S. Treasury notes.

Microloans

The maximum of a loan is $50,000 and the proceeds can be used for working capital, inventory, machinery, office equipment, and other general business purposes. You can not use microloan proceeds to purchase real estate or pay existing debts. Generally, a lender will require a personal guarantee from the business owner. There are no fees. The maximum term of a loan is six years and the interest rate ranges from 8-13 percent.

For more information about SBA loans, you can call or visit a small business development center. Not only will you find help on how to obtain the funds you need, but you can also get free advice and answers to any questions you might have about your small business.

Of course, if the SBA route doesn’t work for you, there are many reputable online lenders with much less lengthy application processes. Check out Credibly for more information.

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