BBBTipsTM on SBA Loans

8/24/2005

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WHAT is the SBA?

The U.S. Small Business Administration (SBA) is a government agency that was created by Congress in 1953 to "aid, counsel, assist and protect…the interests of small business concerns." SBA is the only Federal government agency specifically designed to encourage small business enterprise.

Over the past five decades, the agency has grown in terms of its array of programs and total assistance provided to small businesses. In 2004 alone, the SBA backed more than $12.3 billion in loans to small businesses, made available more than $1 billion for disaster loans and assisted small businesses to secure more than $50 billion in federal contracts.

What are SBA Loans?

One way the SBA helps existing and potential small business owners is to help them get loans through the private sector. The SBA's current business loan portfolio of roughly 219,000 loans worth more than $45 billion makes it the largest single financial backer of U.S. businesses in the nation.

An SBA loan is a loan that has been guaranteed by the U.S. Small Business Administration. Most SBA loan programs are administered through partnerships between SBA and private entities. Businesses in need of capital can seek SBA financial assistance through these lending partners (banks and other financial services organizations).

The most popular SBA loan program is known as the 7(a) guaranteed loan program. In this program, a lender participates with the SBA to offer a new or expanding small business a long-term loan. To a small business borrower, the process is relatively simple:

  • Determine how much capital your business needs and how you plan to use it;
  • Apply for a business loan from a bank or financial services organization of your choice;
  • The lender will evaluate your request against their conventional (non-SBA) and SBA product credit policies and determine which product best meets your needs;
  • The lender handles all interaction with the SBA in the processing of your loan request.

WHO is Eligible for SBA Loans?

All applicants must be eligible and creditworthy to be considered for a 7(a) loan. The eligibility requirements are designed to be as broad as possible in order to permit this lending program to accommodate the most diverse variety of small business financing needs.

Unless otherwise specifically stated, most of the SBA Loan Programs require small businesses to meet the SBA's size definition for small business, be a for-profit enterprise and meet certain requirements regarding personal liquidity and type of business. As with most commercial loans, a lender will evaluate your personal and business credit history, historical business performance and financial trends and your ability to repay the loan.

These criteria are outlined in further detail on the SBA Web site at http://www.sba.gov/financing/sbaloan/7a.html.

WHY Should I Consider an SBA Loan?

The SBA helps to provide long-term financing for small businesses. It is also a source of funds for a new business. In fact, approximately 25 percent of SBA loan guarantees are to finance new business start-ups.

Possible advantages to this form of financing include the following:

  • Terms: SBA-guaranteed loans usually have longer terms than most commercial loans. Loan terms are commonly up to 7 years for working capital, 10 years for equipment and 25 years for commercial real estate.
  • Loan Amounts: SBA loan amounts range from $5,000 (with certain micro-business lenders) to $2 million. They often require a lower down payment than required by conventional loans.
  • Interest Rates: SBA loans generally have competitive interest rates. As with conventional commercial loans, the rates are negotiated between the borrower and the lender; however, the lender must comply with SBA's rate ceilings that are usually tied to the prime rate.
  • No Balloon Payments: SBA loans are usually fully amortizing; loans with balloon payments are prohibited under the SBA program.
  • Purposes: SBA guaranteed loans can be used for most business purposes, including renovation, construction, purchasing inventory, equipment, furniture and fixtures and working capital.

SBA loans are not appropriate sources of financing if:

  • You cannot demonstrate the ability to repay the loan;
  • You do not intend to do business in the U.S. or its possessions;
  • Your business involves gambling activities, lending activities, real estate investment or other speculative activities; or
  • You intend to use the proceeds for an unsound business purpose, repay delinquent withholding taxes, make a change in ownership or business that will not benefit the business, refinance existing debt where the lender might sustain a loss or reimburse funds owed to an owner of the business.

In fact, you will not be approved for an SBA loan under any of these circumstances as that would violate the criteria for an SBA loan.

WHAT are the Credit Requirements?

Lenders will consider a variety of factors when determining if you are creditworthy. They will most certainly look at the cash flow generated by your business; the management experience, credit history and character of you and any other owners in the business; the owners' equity contributions, and the collateral offered by the borrowers. For loan requests exceeding $50,000 and those for start-up businesses, applicants should expect to contribute both business and personal assets to secure the loan. All owners of 20 percent or more of the business are required to personally guarantee SBA loans.

Lenders are also likely to consider the credit history of your business, how quickly it collects money owed for its goods and services, whether the business has a profitable history, if sales are growing, the future of the industry overall and how your business is positioned against its competitors. In addition, lenders may well consider other factors, depending on their underwriting policies.

ADDITIONAL Factors to Consider

The timing for approval of an SBA loan depends on the lender and how thoroughly you prepare the loan application and respond to lender questions. Some lenders may be able to make a credit decision within two to three days; others may take a couple of weeks. Generally, the more complex the loan request, the more lead time required to make the credit decision.

Fees and prepayment penalties are another consideration. The SBA charges lenders a guaranty fee at loan origination that is based on the amount of the loan guaranty. Lenders generally pass this fee along to the borrower. The fees can usually be financed (built into the loan amount). Prepayment penalties apply to certain SBA loans, depending on the maturity of the loan and timing of the prepayment.

Finally, there are maximum loan amounts depending upon the loan program and the size of the loan guaranty.

WHAT Kinds of SBA Loans are Available?

There are three basic types of SBA Loan Programs: the Basic Section 7(a) Loan Guaranty Program; the Section 504 Certified Development Company (CDC) Program; and the MicroLoan, a Section 7(m) Loan Program.

Basic 7(a) Loan Program: This is the most basic, most commonly used and most flexible type of SBA Guaranty loan. It's a term loan (which means it's repaid in monthly installments of principal and interest) used for both start-up and existing small businesses. Most often, it's used for loans in the $50,000 to $1 million range, with a term of five to 10 years. The negotiation of loan terms (interest rates) is between the lending institution and the borrower, subject to SBA requirements.

There are guaranty and servicing fees associated with this loan that are determined by the amount of the loan and the portion that is guaranteed; these fees may be passed along from the lender to the buyer. There are also prepayment penalties that pertain to loans meeting specific criteria.

Specific types of loans that fall under the 7(a) guaranteed loan program umbrella include the following:

  • SBALowDoc (Low Documentation) Program, which streamlines the making of small business loans up to $150,000. It features a one-page application that the business owner works with the lender/bank to complete, and a quick turnaround time. The SBA responds to lenders within 36 hours of receiving a completed application.
  • SBAExpress Loans (Term or Revolving Credit) that are available from participating SBA Preferred Lenders. Under this program, lenders are permitted to use their own forms, analysis and procedures to process the loans and to approve term loans and lines of credit up to $350,000;
  • CapLines (Line of Credit) that offer credit lines to help small businesses meet their short-term and cyclical-term capital needs. The five available credit lines include a seasonal line of credit, a contract line, a builders line, a standard asset-based line and a small asset-based line; and
  • Export Working Capital Program (EWCP), a combined effort of the SBA and the Export-Import Bank, to provide short-term capital to exporters. Featuring a one-page application form and streamlined documentation, EWCP loans usually have a 10-day or less turnaround time.

For specific loan amounts and other types of financial assistance available under the 7(a) Loan Guaranty Program, visit the SBA Web site.

Section 504 Certified Development Company (CDC) Program: This loan program provides small businesses that require "brick and mortar" financing with long-term, fixed-rate financing to acquire real estate, machinery or equipment for expansion or modernization. It was designed to enable small businesses to create and retain jobs. The program is delivered through Certified Development Companies (CDCs), which are nonprofit corporations set up to contribute to the economic development of a community or region. There are about 290 CDCs nationwide.

MicroLoan, Section 7(m) Loan Program: SBA developed this program to increase the availability of very small loans to start-up or newly developed small businesses. Under this program, the SBA makes funds available to nonprofit intermediaries, which in turn make loans to eligible borrowers. Loan amounts range from under $100 to a maximum of $35,000 (the average is about $10,500). Loan terms vary, but the maximum term is six years. Completed applications are usually processed by the intermediary.

For information on other SBA loans that are available to small businesses, visit the SBA Web site at www.sba.gov and click on "Financing."

WHERE do I Apply for an SBA Loan?

After you have determined which loan program seems to best meet your capital requirements, you need to find a lender. All SBA loans are processed by banks and other financial services organizations. Your local SBA district office Web site can provide a list of the most active lenders in your area, so it's a great place to start. [To access local SBA district office Web sites and other local resources, go to www.sba.gov/regions/states.html and click on your state.]

You may also want to call your local SBA office to learn more about the different loan programs offered by various lenders. Some lenders have been delegated expanded authority by the SBA, so they can often respond to your request in a timelier manner than lenders who are not as active in SBA lending. Intermediaries (which include non-profit organizations) are also selected by the SBA to process certain SBA loans. You can find a listing of SBA Express/Certified/Preferred Lenders by state on the SBA Web site at http://www.sba.gov/services/financialassistance/7alenderprograms/index.html.

When deciding which lender to apply to for a loan, recognize that different lenders may participate to various levels in the different SBA loan programs. Lenders may be local, regional or national and tend to specialize in one or two segments of the SBA loan market. You may want to consider calling at least three of the lenders found on the local SBA district office Web site, to obtain more specific information concerning the types of loans they offer and their loan requirements.

HOW do I Apply for an SBA Loan?

As previously stated, you request your loan through a bank or financial services organization that participates in the SBA loan program. Most active SBA lenders will have an application form and checklist available to guide you through the application preparation process. Personal financial statements will be required of you and your business partners. These typically include a listing of personal assets and liabilities, one to three years of tax returns, recent pay stubs, home mortgage statements and personal credit references.

Requested business documentation is likely to include a business profile that describes the type of business in which you are engaged, annual sales for the past three years, number of employees, length of time in business and ownerships. You can expect to provide complete financial statements for your business for the past three years and current interim financial statements. The business financial statements should include a balance sheet and a profit and loss statement. Cash flow projections and accounts receivable and payables aging may also be requested. If you are starting a business, be prepared to provide a projected balance sheet and income statement.

Depending on the size and type of your loan request, you may be asked to prepare a business plan to include with your loan proposal. The plan should include a description of your loan request, how the funds will be used and how they will benefit your business. Describe the collateral you are offering to secure the loan, including business and personal assets and the source for your equity injection in the business, including borrowed funds and available cash.

Once you have completed your loan paperwork, the lender will evaluate your loan request and decide whether to loan you the money. If the lender believes that your loan request has merit, but needs additional support, it will request an SBA guaranty. The lender will then prepare loan closing documentation for your signature. Once all terms and conditions of the loan approval are fulfilled, the lender will close and disburse your loan.

WHAT if I'm Not Approved?

Not every applicant qualifies for an SBA loan. Lenders apply a variety of credit criteria to their decision-making process and lenders have different appetites for risk. Encourage an open dialogue with your lender of choice during the credit review process. If your request is declined, ask that the lender provide you with the reasons in writing.

ANYTHING Else to Consider?

The SBA has Business Information Centers (BICs) nationwide that function like business libraries. You can access helpful resource and reference materials on obtaining financing, writing an effective business plan, starting your business and expanding your operations or markets. The centers provide high-tech hardware, software and telecommunications, and offer expert counseling by SCORE volunteers. For a listing of BICs, go to www.sba.gov and look under "Your Local SBA Office."

BEWARE!

The U.S. Small Business Administration does not offer grants to start or expand small businesses! Do not fall victim to scam artists who pretend to offer access to SBA grants or other government grant funding. If you spot an advertisement for "free government grant money" in the classifieds or your office e-mail "In Box" don't respond. You can easily access a listing of federal agencies that do offer grant resources on your own by visiting www.sba.gov/financing/basics/grants.html.

For More Information on SBA Loans

Business.gov (www.business.gov) is the official business link to the U.S. Government. It offers a section on SBA Loans to help small business owners find out which SBA loans may be right for their needs. The section on Borrowing Money includes a Self-Assessment Checklist to help you assess whether you are ready to seek capital.

Consumer @ction (www.money-wise.org) has published a Consumer Action Publication entitled "Micro Business Basics: Building a Sound Financial Foundation" to assist owners of very small businesses that employ few employees.

The Federal Citizen Information Center (www.pueblo.gsa.gov) has a section on Small Business, with helpful publications and lists of resources for those starting a small business. Included is an SBA Borrower's Guide that walks you through the various SBA financial assistance programs and how they work, discusses alternatives to bank financing and lists business counseling and training services provided by the SBA.

FirstGov.gov (www.firstgov.gov), the U.S. Government's Official Web Portal, has a section for "Businesses and Nonprofits" that offers hyperlinks to information on financing a business, obtaining business loans, other types of financial assistance and state business resources.

The SBA Online Women's Business Center (www.onlinewbc.gov) has information on SBA guaranteed loans and how to qualify.

The Service Corps of Retired Executives (SCORE) offers publications and can also put you in touch with an experienced retired business owner to serve as a mentor. Visit their Web site at www.score.org or call 1.800.634.0245 for a SCORE office near you.

The U.S. Small Business Administration (www.sba.gov) was created specifically to assist and counsel small businesses. It offers details on SBA loan programs, special purpose loans, the Small Business Investment Company Program and the Surety Bond Program.

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