When looking for small business loans, it can be rather overwhelming. Many small business owners require loans for a new business, to provide working capital funding or purchase equipment. It is not always possible (or desirable) to use personal savings for the many expenses associated with starting a business. Established businesses may end up needing to borrow money for new equipment or to replace uninsured losses. The Small Business Administration (SBA) is a government organization designed to help out.
What does the SBA do?
The SBA does not lend money. Instead, it backs loans provided by lenders that range from banks to community development organizations. The SBA guarantees that the loan will be repaid even if the business itself fails. The SBA also helps businesses obtain surety bonds and regulates Small Business Investment Companies that can help a small business partner with a venture capitalist. What are the advantages of an SBA-backed loan? SBA loans generally have longer terms than the loans businesses can obtain on their own. This is particularly important for new businesses. Many lenders will only give a new business a short term loan, a year or even less. Because this reduces the payments, it can make it easier for your business to qualify for a larger loan. Additionally, banks are not allowed to impose prepayment penalties on SBA loans. These loans are also fully amortized, meaning that if you need to renew the loan, there will be no associated fees and the bank cannot charge you for reappraisal of collateral or hit you with unexpected balloon payments.
Available SBA Programs
The 7(a) loan program
The 7(a) program is for businesses with specific special needs. Mostly, these businesses fall into two categories: businesses that operate in rural areas and businesses that export to foreign countries as part of their business. Businesses particularly impacted by NAFTA are also eligible for 7(a) loans and special loans can also be acquired for Employee Stock Ownership Plans and pollution control. A business can borrow up to $1.5 million through this program, and the funds can be used for working capital, land or building purchases, construction or to refinance loans that are not under reasonable terms and conditions. It is also possible to get a 7(a) loan to purchase an existing business. 7(a) loans cannot be used for 'unsound business purposes'.
The Small Business Administration microloan program is for businesses that only need to borrow a small amount of money. The maximum amount that can be borrowed under the program is $50,000. These loans are intended to increase working capital, or purchase supplies, furniture, or equipment. They cannot be used to pay off other debts. Also, businesses that apply for a microloan may be obliged to receive technical assistance through the lender. The maximum term is six years and the lender may require collateral.
CDC/504 Loan Program
The Certified Development Company/504 loan program is for long-term, fixed-rate financing for businesses that are purchasing major fixed assets. This normally means real estate purchases or significant improvements. It covers both new construction and major renovations. A CDC/504 project is funded by a private sector loan to cover 50% of the cost, a CDC loan to cover 40%, with the borrower putting up the final 10%. Only businesses with less than $7.5 million tangible net worth and less than $2.5 million net income are eligible for the project. The loans max out at $1.5 million if the project meets certain job creation criteria. For these loans, the business needs to create or retain a job for every $65,000 borrowed, or $100,000 if the business is a manufacturer. If the loan is to meet a public policy goal such as revitalizing the business district, rural development or meeting federal standards or policies, the maximum amount is $2 million.
What are the disadvantages of an SBA-backed loan?
One of the biggest disadvantages is that an SBA-backed loan has to be personally secured. This means that if your business venture should fail, you will be personally responsible for repaying the loan. This could cause the loss of personal assets and even push you into personal bankruptcy. Also, you will be required to take out life and hazard insurance. If real estate is being used as collateral, it will need to be properly appraised.
What are the normal rates on SBA loans?
The SBA sets a maximum rate of 2.75% over the National Prime Rate for longer term loans (over seven years). For other loans, the rate is 2.25% over.
Is it true that SBA loans are for people with bad credit?
Not at all. You do not have to be turned down by a lender to get an SBA-backed loan. However, you also need a decent credit history to obtain one. The SBA will make a careful assessment of your ability to repay the loan before you can take it out, along with the lender. In some cases there can, as a result, be more associated paperwork.
Do you have to pay extra administrative fees on an SBA loan?
The SBA does charge a guarantee fee, which is based on the loan amount, but it is generally financed with the loan. Obviously, these loans still have processing costs associated with them. The extra cost of getting life insurance if you do not already have it should also be taken into account.
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