What Is The SBA?

The SBA is the government administration established to help small business owners, either start-up entrepreneurs, or established businesses, who can not find conventional financing. It is easier to receive financing with the help of a government guarantee. These guarantees are given to lenders to help strengthen a loan in the eyes of the lender. The government does NOT lend the money. The SBA Loan Programs are only available in the United States.

Who Lends The Money?

SBA loans are funded by banks, credit unions, and private lenders, licensed by the US Small Business Administration as a part of the SBA lending program. The loan must not only fit into the qualifications of SBA but also the lender's standards.

What Types Of SBA Loans Are Available?

There are several types of SBA Loans available to fit almost all needs. The beauty of the SBA Loan Program is long term financing to help businesses who need smaller payments and a longer term to pay off the loan. If you are an established business there is no down payment required:

1. The primary loan program under SBA is the 7(a) Loan Guaranty Program
2. The giant real estate program is the 504 Loan Program
3. The SBA Express Loan Program is available for businesses who are well established (3 years) with good credit and good debt service. The maximum loan amount is $350,000. These loans are usually given by a Preferred Lender (PLP) with a 50% guarantee from the government and are usually funded very quickly. These loans are usually credit scored
4. The Export Working Capital Program for businesses exporting out of the country is done through the U.S. Export Assistance Center (USEAC)
5. Micro loan Programs are available through various community capital programs and can run from a few hundred dollars to the maximum amount of $25,000. These are for very small businesses and business needs
6. The Patriot Express or the Veteran's Program, was set up to assist U.S. Veterans obtaining financing for businesses. These loans are up to $350,000 with an 85 % guarantee
7. Small business Investment Company Program(SBIC)s are privately held, for profit, managed investment firms, licensed and regulated by the SBA to assist with investment capital or loans for start up or new product businesses

What Is The 7(a) Program?

The 7(a) program is an umbrella covering a wide variety of loans. This loan can be used for a variety of purposes:

1. Machinery and equipment purchases
2. Real estate purchases
3. Business purchase
4. Inventory
5. Debt Refinance
6. Construction
7. Working capital
8. Franchise purchase

The small 7(a) program has a guarantee of 85% on loans $150,000 or less.
The large 7(a) program has a guarantee of 75% on loans more than $150,000 up to a maximum of $2million.
There is no down payment required except for the real estate portion. There is a 30% equity injection requirement for start-up businesses.

All loans are fully amortized with long term financing, no balloons and no prepayment fees except for 3 years on the 7(a) real estate. There are fees paid to the government on the guaranty portion and ALL interest amounts are negotiated with the lender subject to SBA regulations.

What Is A 504 Real Estate Loan?

The 504 Real Estate Loan Program allows a company to purchase its own building, construct or do a major renovation with a 50-40-10 financing, allowing the applicant to inject only 10% of the total project cost. Loans to start-up businesses or special purpose would require an extra 5% down each.
The building (7(a) and 504) must be 51% owner occupied or 60% owner occupied in the case of new construction.
The bank provides a 50% conventional first mortgage with the remaining 40% of the project provided through a Certified Development Company (CDC). The CDC portion is a fixed rate tied to the debentures, fully amortized over 25 years. There is a ten year prepayment penalty. The maximum amount at this time is $4.5 million with additional allowed for manufacturing. Check with your lender and a CDC.

Do I Qualify For An SBA Loan?

Most small businesses are eligible for the SBA loan program.

1. The applicant must be a for profit business
2. The business must be independently owned
3. The business must be non-dominant in its field
4. The business must be located in the U.S.
5. The business must show a need for the loan.
6. There are three basic criteria for eligibility:
• Type and size
• Use of proceeds
• Personal Resources and issues.

What Is Type And Size?

Most small businesses are eligible. All legal forms of organization are eligible. (Sole proprietorships, Partnerships, Corporations, and LLC's.) Most franchises are eligible, however, Uniform Offering Circulars and Franchise Agreements must be REVIEWED AND APPROVED BY THE SBA in advance. Approved franchises may be checked on the internet at www.franchiseregistery.com .

The size of an eligible business is determined either by number of employees, ( up to 500+ for manufacturing) or by total receipts ( up to $6 million - $25 million for retail, 28.5 million for contractors , $12.5 million for specialty businesses such as plumbers.) Standards are defined by North American Industry Classification System (NAICS).

Some businesses are ineligible such as:

1. Businesses of a prurient nature (Porn movies etc.)
2. Certain franchises with too much control (7 Eleven's)
3. Apartment buildings
4. Storage Units

SBA does NOT loan on any speculative or investment properties.

What Is Use Of Proceeds?

Use of proceeds usually falls into five main categories:

1. Working Capital
2. Debt Refinance ( An SBA loan can NOT be used to refinance an SBA loan)
3. Inventory
4. Equipment Purchase
5. Real Estate

SBA loans can also be used for businesses purchases.
SBA loans can NEVER be used to pay delinquent taxes.
SBA loans CAN be used to start-up a new business.

What Is Meant By Personal Resources And Issues?

Personal Resources refer to an applicant's personal resources, liquidity and net worth. If you are a business owner with large amounts of liquid assets, you are seen as capable of getting conventional financing or self-financing. Liquid assets are cash, savings accounts, CD's, cash value of insurance and marketable securities. Real Estate is not considered a liquid asset and neither are retirement accounts ( 401K, IRA etc.).

Personal issues refer to immigration status and criminal background. Applicants must be a US citizen or be a legal resident alien. Foreign owned companies can be eligible under special circumstances. Form 912 (Management resume) asks questions regarding criminal records and must be answered by all applicants. Singular incidents remote in time can be dealt with at the District level, however, applicants with a severe or more recent criminal history will be fingerprinted and have an FBI background check.

What About Start-Up Loans?

The SBA DOES guarantee start-up businesses. These usually require an adequate equity investment (usually 30% of total project cost), good credit, good management ability, a viable business plan, good earnings projections and if available, collateral. The SBA, however, will guarantee an unsecured loan as long as everything else is in place. It is up to the lender whether they will accept an unsecured loan with the guarantee in place. Equity investment can come in the form of previously injected funds and borrowed funds, such as from family etc.

Can I Qualify With A Bankruptcy?

An Applicant can qualify with a bankruptcy on his record as long as it is remote in time and there was a good reason behind the bankruptcy (i.e. illness, disaster).

What FICO Scores Are Required?

Of Course the higher your score, the easier it is to get a loan and the better interest rates are available. This again depends on the lender as some lenders will look at loans with lower scores than others. Lenders will usually look for 630 and above. Some will go lower but only with a very good reason. Many applicants have low FICO scores because they have not kept track of what has been put on their record. It is good to check your credit report every six months and immediately dispute any wrong entries.

Do I Need Collateral?

The rule of thumb is, if there is collateral available, it must be pledged, however, the SBA will guarantee an unsecured loan if there is no collateral but everything else is in place. (Good credit, good cash flow etc.) The lack of collateral may deter some lenders even with a government guarantee. Remember, collateral may be real estate, accounts receivable, UCC filings on equipment, and in some cases inventory. It depends on the lender.

For Answers To Other SBA Related Questions, Please Go To: www.sba.gov