SBA loans are business loans which the Small Business Administration guarantees. The government agency offers SBA loan guarantees of up to 85 percent of the loan amount offered through an SBA-approved lender–usually banks–for their various SBA funding programs. Through these SBA-guaranteed loans, the three key SBA loan programs allow you to borrow money for almost any business purpose— including working capital, purchasing inventory or machinery, refinancing certain debts or buying real estate.
The reality is that many small businesses are struggling and for that there are a variety of reasons— under-capitalization, lack of planning, or the individual who owns the business is really good at one thing but poor at another. They may be excellent at baking cakes for example, but perhaps they do not know how to read financial reports. But after the credit crisis that began in 2008, banks seized on loans to businesses and individuals and, in general, loaned only to large established enterprises that had already been highly capitalized. In this environment, loans sponsored by SBA became all the more relevant as a lifeline for small businesses, and in some instances the federal government acted to lower rates and increase the amount of small business loans they would guarantee for banks from 75% to 90%.
The SBA does not make loans on its own, but rather sets out lending criteria that it will guarantee from a range of partners, such as banks and other borrowers, economic development organizations and micro-enterprise lenders. By ensuring that loans made by these institutions to small businesses are repaid, the federal government eliminates some of the risk to financial institutions, so that they are more likely to consider loans to small businesses.
Who qualifies for a Small business Administration Loan?
Securing a loan from SBA is no easy feat… So how do you get one?
As it turns out, many companies may apply for an SBA loan, including small or newer ones. Your credit score will be the most important factor: SBA loans are for business owners with a good borrowing background.
Be prepared: SBA loans typically require a great deal of time, money, care and documentation.
Don’t trust any lender who claims to provide today’s SBA loans: it’s certainly not a loan that you’re going to apply for and receive funding within a few days. That said, SBA loans are surely fit to grow your business and to refinance your other debt at the lowest rates available.
If your company has a poor track record, or especially if your credibility is bad, you can find it difficult to apply for an SBA loan. The SBA and your lender stick their neck out on the belief that you are a reliable borrower, after all.
How to secure an SBA loan?
In general, SBA-backed loans are available to any small business, but to qualify, yours will have to meet certain criteria. And even if you follow the criteria of the federal government, you still need to apply and get licensed for a commercial lender.
The Government’s SBA-backed loan requirements are as follows:
1. For private financing, the business first has to be turned down.
Yeah, you read it right. Your business needs to try to secure a loan directly from a bank or other financial institution or lender. Under the statute, the SBA is not in a position to offer loans to businesses that can raise the capital they need alone. So you have to apply for a loan and be turned down on your own.
2. The size requirements of the SBA must be met by your business
Your firm needs to meet the government’s concept of a small business for your industry in order to qualify as a small business. Many industry size criteria are based on average annual receipts; other industries are measured based on the number of employees that, although there are exceptions, can usually not exceed 500 jobs. The SBA maintains a comprehensive list of industrially broken down size requirements.
3. Depending on the type of loan your business might need to meet certain conditions.
For various reasons the SBA provides a number of loan insurance programs. Those are listed below. Until applying, make sure that you review the criteria for the specific loan that you want to assess your eligibility.
4. The business also needs to meet the requirements for lenders.
You need to apply for a commercial loan after deciding that your company meets the SBA requirements— and the qualifications for that are often more arduous. “To obtain a SBA loan, you must apply a loan application to a bank, credit union, or other financial company that handles SBA loans,” says Jim Anderson, Management Counselor for Orange County SCORE, a national non-profit Small Business Mentoring and Training Organization, and a former Management Consultant who has spent time working with Honeywell and Ford Motor Co.
“You cannot secure the loan directly from the SBA; the SBA makes loans available to participating providers and offers a government guarantee to lenders. The SBA has approved some borrowers as ‘Preferred Lenders’ who may accept loan applications on behalf of the SBA, which can speed up the lending process.”
A misconception is the SBA steps in to support a failing business. We the people’ don’t want to use capital to guarantee a company that is struggling. The system does not exist simply to offer a loan to a woman. She has to be a decent credit individual, her own money, a great business plan and a little bit of success. You can’t have a money-losing business and ask the SBA or anyone else to guarantee the loan. That wouldn’t make any sense.
Types of Small business Administration loan
SBA loans come in various forms, with different permissible uses. “Most of these loans can be used for working capital, renovating business buildings, purchasing machinery, funding receivables and, in some cases, financing the acquisition of company facilities,” says Anderson. “Existing businesses and start-ups may qualify for SBA business loans, but some lenders do not finance start-ups.” It is best to do your homework on the various types of loans before applying. Most are identified by names reflecting the section of the law which established the category of loans. Here are the main SBA-backed loan categories:
1. 7(a) Loan Program
This is the most widely used— and most versatile— form of loan by the SBA to support start-ups and established small businesses when they are unable to obtain financing through normal channels. It was called to Small Business Act section 7(a). It is versatile because it can be used for a variety of purposes, including purchasing machinery or equipment or furniture, buying immovable property, leasehold improvements, working capital or even debt refinancing.
For these loans the maturity period is up to 10 years with working capital and up to 25 years for fixed assets. In general, the overall liability of the SBA for such loans is limited at $1.5 million, and since the agency can guarantee up to 75 per cent of a 7(a) loan, a company may borrow up to $2 million. (SBA’s share in such loans was increased to 90% under the American Recovery and Reinvestment Act, which was passed in February 2009 but should decrease unless it was extended by Congress.)
2. CDC/504 Loan Program
This is the type of loan that offers long-term, fixed rate funding for small businesses to typically buy real estate or machinery or equipment for expansion or modernization. To cover up to 50 percent of the loan, a private lender must consent. Meanwhile, a Licensed Development Company, one of hundreds of independent, non-profit corporations designed to assist economic development, receives 40% of the loan. At least 10 per cent of equity must be allocated by the creditor. This loan includes a major capital investment for vehicles, machinery and/or real estate.
A business might want to move out of the rental space and buy a small building and that’s their loan. They must have an occupancy of 51 per cent. You couldn’t purchase the building and only occupy 1 percent. “The SBA’s overall debenture is $1.5 million when firms commit to job creation or community development targets. Generally, corporations are required to create or maintain one job for every $65,000 provided by the SBA— but small manufacturers have a $100,000 work retention or job creation obligation. SBA will contribute up to 2 million dollars if public policy goals are achieved, including business district revitalization, export growth, creation of minority undertakings, rural development and more.
3. Microloan Program
For small (up to $35,000), short-term loans, the SBA’s Microloan Program may be right to provide the support it needs to your company. The loans may be used to buy work capital or inventory, furniture or fixtures, materials, machinery and/or equipment. The target audience is small businesses and non-profit child care centers that need small-scale support and maybe some technical assistance for start-up or expansion purposes. Such loans are administered through certain approved micro-creditors, who are non-profit organizations with expertise in funding small loans and providing technical assistance to companies.
Applying for an SBA loan is like applying for a regular commercial loan— and this might be the last resort for your company because you’ve had to be turned down on your own for a business loan. It is not as simple as going into an SBA office and demanding a loan application. You need to do all the requisite homework and put together all the paperwork you would need before you approach a commercial bank. Which means you need to study and be prepared to discuss your personal credit history. You need to compile the company’s historic financial reports. And you need a business strategy.
Some borrowers should receive some support from a party with expertise in planning SBA loan packages, and are mindful of the conditions of the lenders, Anderson says. Typically, support can be accessed from Ratings, Small Business Development Centers, Certified Public Accountants (CPAs), and consultants in many communities.
“It’s important to understand that borrowers need substantial information to justify making a loan and support their request for an SBA guarantee,” says Anderson. “It’s often difficult to succeed in small business and borrowers, though willing to take any risk, have to protect themselves from losing money on the loan. Lenders need to be persuaded that with the agreed interest you are able to pay back the loan. ‘