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Should you be considering an SBA loan for your business?
Many business owners are looking for ways to fund the growth of their businesses. Oftentimes, this growth is funded personally or by friends and family. However, debt financing can also be an option for some businesses. Especially, if the business has established a history of positive financial performance. In some cases, the Small Business Administration ("SBA") lending programs can be a good solution.
The "SBA is congressionally mandated to assist the nation's small businesses in meeting their financing needs. The agency's finance programs enhance the ability of lenders to provide short and long term loans to small businesses that might not qualify through normal lending channels.
There are three basic types of SBA loan programs: the 7(a) Loan Guarantee Program, the 7(m) Microloan Program, and the 504 Certified Development Company Loan Program.
Basic 7(a) Loan Guaranty Program
The 7 (a) Loan Guarantee Program is the SBA's primary loan program. It is also the most flexible, since the agency can guarantee financing under the program for a variety of general business purposes. To qualify for this loan, a small business must meet the loan guaranty criteria and the lender must certify that it cannot provide funding on reasonable terms except with an SBA guaranty. The SBA can guarantee up to 85% of a loan that is $150,000 or less and 75% of a loan that is greater than $150,000. In general, the maximum loan size the SBA can guarantee is $2 million and the maximum guarantee the SBA can provide is $1 million.
In guaranteeing a loan, the SBA assures the lender that if the borrower does not repay the loan, the government will reimburse the lender for its loss, up to the percentage of the SBA's guaranty. The borrower, however, still remains obligated for the full amount due. The terms of these loans range from 5 to 10 years for working capital loans and up to 25 years for fixed asset loans. The maximum rates for these loans are approximately 2.25% over the Prime Rate for loans with a maturity of less than 7 years and 2.75% over Prime for loans of 7 years or greater.
7(m) Microloan Program
The SBA Microloan Program provides very small loans up to $35,000 to small businesses through a network of locally based intermediary lenders. Microloans may be used to finance: furniture, fixtures, equipment, inventory, materials and supplies. They may also be used to finance receivables and working capital. However, they may not be used to purchase real estate. The maximum term for the loan is 6 years and interest rates can be up to 8.5% over the intermediary's cost of borrowing from the SBA. Microloans are direct loans from the intermediary, they are not guaranteed by the SBA.
504 Certified Development Company
The 504 Certified Development Company ("CDC") Program provides growing businesses with long term, fixed rate financing for major fixed assets such as land and buildings. Approximately 270 CDCs nationwide work with the SBA and private sector lenders to provide financing to small businesses. In general, CDC's are non-profit corporations set up to contribute to the economic development of their local communities. The program is designed to enable small businesses to create and retain jobs.
A typical 504 project includes a loan secured by a senior lien on the financed asset made by a private sector lender (covering 50% of the fixed financing). It also includes a loan secured with a junior lien made by a CDC covering 40% of the financing. The borrower must contribute the remaining 10% of the equity. Generally, personal guaranties of the owners of 20% or more of the business are also required. Interest rates on these loans approximate the market rate for 5 and 10 year U.S. Treasury issues, plus a small increment. The terms on these loans range from 10 to 20 years.
The SBA 7(a), 7(m) and 504 lending programs were put in place to help small businesses with their financing needs. So if you are looking for other ways to fund the growth of your business. Debt financing through the SBA may be a solution to consider.
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Pinnacle Consultants L.L.P.
20704 N. 90th Place
Scottsdale, AZ 85255
P: 480 980-3977
F: 480 585-1920
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