The Small Business Administration (SBA) offers myriad loan programs to help small business owners obtain the necessary financing to either start a new business or keep existing companies going strong. In most cases the SBA doesn’t actually disburse loans directly, but rather provides lenders with federal guarantees and backing. When you apply for an SBA loan you will be going through a financial institution like a bank or an SBA participating non-bank lender.
The SBA 7a Guaranteed Loan program is the SBA’s most common business loan program. The SBA guidelines define the maximum and minimum loan amounts, use of proceeds, and maximum interest rates as well as other specifications. The financial institution that is providing the actual funding may establish more specific requirements as well. However, SBA-backed loans are often characterized by lower down payments (i.e. less equity required from the borrower), lower interest rates, longer terms and more flexibility than other offerings. Further, they may be preferable from the perspective of the lender because of the federal backing. Because SBA loans provide a government guaranty, they may have more requirements from a borrower looking to qualify for such a loan. SBA 7a loans may be used to finance working capital, purchase furniture, fixtures, machinery or equipment, or purchase land and/or buildings. They may also be used for construction and renovations, business acquisitions, and the refinancing of existing debt. The maximum loan amount is $5 million. The business must meet certain size standards to be considered a “small business” (most businesses will qualify), be located in the U.S. or its territories, and satisfy certain other criteria. SBA 7a loans of $350,000 and under must initially have a FICO Small Business Credit Score of at least 140 (this is different from the borrower’s personal credit score). The business owner must be a U.S. citizen or legal permanent resident. SBA 7a loans are generally self-amortizing with either floating or fixed interest rates.
The SBA 504 Loan program is designed to finance fixed assets and stimulate employment through job growth or retention. The loans are processed through non-profit Certified Development Companies (CDCs) in conjunction with participating banks. Generally the borrower must inject between 10-15% of the cost of the project. The CDC issues bonds guaranteed by the SBA for up to 50% of the project cost (generally the debenture cannot exceed $5 million) and the participating lender funds the balance, taking a first lien position on the assets acquired. The eligibility requirements are similar to SBA 7a loans with the addition of proof that a certain number of jobs will be created or retained based upon the amount financed.
The SBA SBIC program is a program whereby licensed private entities use their own capital together with monies borrowed from the SBA to provide loans to qualified businesses. SBICs generally make loans with an equity feature (meaning they take an ownership interest in the company). The SBIC will generally look for a return not only from the interest on the loan but also from the sale of their equity piece.
The United States Department of Agriculture Business & Industry Guaranteed Loans (USDA B&I Loans) were established to promote industry in rural communities by providing loan guarantees of up to 80% to participating lenders. Rural communities are generally defined as those with a population of 50,000 or less. The loans can range up to $10 million with terms not to exceed thirty years for real estate and up to fifteen years for machinery and equipment. The interest rate is set by the lender.
Other types of small business loans (some of which qualify as conventional and government backed loans)
The United States Department of Agriculture Business & Industry Guaranteed Loans (USDA B&I Loans) were established to promote industry in rural communities by providing loan guarantees of up to 80% to participating lenders.
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