What is an SBA Loan?

Small businesses in America employee a little 50% of all persons working in the USA, thus the reason it is important for small businesses to have access to capital to grow and expand their companies.  The Small Business Administration (SBA) provides several loan programs to accomplish this. The Small Business Administration is a cabinet level agency within the Federal Government to support small businesses

What is an SBA loan? An SBA loan is a partially guaranteed loan offered by banks, Certified Development Corporations (CDC) and other approved lending institutions at times referred to as intermediary lenders, within the parameters and guidelines set by the Small Business Administration. The SBA is not a direct lender other than the Economic Injury Disaster Loan (EIDL).

Lending institutions are provided some latitude on the lending guidelines and requirements established by the SBA.  A few of the lending guidelines and requirements the lending institutions can establish for themselves are, credit score, business type and size of loan. For example, the SBA has a minimum credit score requirement, the lenders can be more stringent on the credit score, they are not permitted to offer an SBA loan with a score lower than the SBA minimum. The same is true for business type some lenders may provide loans for a business sector and another lender may wish to not lend to that specific business sector. For example:  the hospitality industry is an approved SBA category, one lender may welcome a hospitality loan and another lender may not wish to loan to a hospitality business.

There are approximately twelve different types of SBA loans established for different purposes and all have their own specific guidelines and requirements. Some are variations of the most frequently used SBA loan programs. The three most frequently used SBA loans are the SBA Micro Loan, the SBA 7A and the SBA 504. All three have a specific use within the marketplace. The loan that is correct for you is the one that addresses your specific needs. 

Below is a general overview of the three most used SBA loans:

The SBA Micro Loan

1. Maximum Loan:  $50,000
2. Use of Funds:  Working Capital – Inventory – Supplies- Furniture – Fixtures – Machinery – Equipment
3. Cannot be used for real estate purchases

The SBA 7A Loan (Most frequently used SBA Loan)

1. Maximum Loan: $5.0 Million
2. Use of Funds:  Purchasing a Business – Working Capital – Machinery and Equipment – Furniture and Fixtures, Renovations, New Construction, Real Estate Purchase, Debt Restructure to name a few
3. In many instances real estate can be purchased with as little as 10% down. (Specific underwriting criteria will apply)
4. Typically, this is a variable interest rate loan.

The SBA 504 Loan

1. This is a terrific program for long term larger fixed assets such as real estate.
2. Program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation.
3. From a borrower’s perspective the 504 loan is somewhat more complicated than the other two SBA loans because, two lenders involved. There is a lead lender or participating bank and a community Development Corporation commonly referred to as a CDC.
4. Simplistically the 504-loan works like this. A business wants to purchase a building for $10.0 million. The borrower’s down payment is $1.0 million, a participating bank would loan the borrower $5.0 million, and a CDC would loan the borrower $4.0 million. This greatly reducing the risk to the participating bank making the loan more appealing.

Even though the loans are partially guaranteed by the SBA, they are not grants. As with all loans there is a payment schedule that needs to be adhered to.  The guarantees are designed to reduce the risk to the lenders, making loans somewhat easier to obtain for small businesses that would otherwise not have access to capital. All SBA loans are personally guaranteed commonly referred to as a PG, and if available are frequently cross collateralized by either a house or another business that you or spouse may own. I like to look at both as an insurance policy and are there for such purposes. As long as the payment terms are adhered to the PG and cross collateralization never becomes an issue.

The downside to all of the SBA loans is there is more paperwork than for a non-SBA transaction because they are insured loans. I point out to all of my clients; the process is temporary, and the benefits of the loan are permanent. In the end the growth and expansion of the business outweighs the paperwork.