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The Most Popular Small Business Administration Loan

For many small businesses, an SBA 7a loan can make the difference between surviving and thriving.

During the federal government’s 2016 budget year, the U.S. Small Business Administration (SBA) approved about $24 billion in loans through the 7a loan program, making it the most common type of SBA loan for small businesses.

What is an SBA 7a Loan?

The SBA 7a loan program helps startups and existing small businesses gain financing for an array of business purposes.

The SBA does not grant 7a loans, but instead guarantees, or financially backs, loans made by participating financial institutions, such as banks, credit unions, and private lenders. It’s considered easier to obtain an SBA 7a loan than a traditional business loan.

According to the SBA, a business can use the proceeds of a 7a loan to:

Provide long-term working capital to pay for operating expenses, accounts payable, or inventory purchases.
Cover short-term working capital needs, including seasonal financing, construction financing, and exporting.
Provide revolving funds based on the value of existing inventory and receivables.
Buy equipment, machinery, furniture, fixtures, supplies, or materials.
Buy real estate, including land and buildings.
Put up a new building or renovate an existing building.
Establish a business, or aid the acquisition, operation, or expansion of an existing business.
Refinance existing business debt.
The SBA says you cannot use a 7a loan to:

Refinance existing debt that would cause the lender to sustain a financial loss because the SBA then would assume that loss.
Pave the way for a partial change of business ownership or to make another change that won’t help the business.
Enable reimbursement of funds owed to any owner of the business.
Repay delinquent state or federal withholding taxes or other money that should be held in a trust or escrow.
Finance a business that does not fit the SBA’s definition of a “sound business purpose.”

How Does an SBA 7a Loan Work?

The maximum amount that a business can borrow through the SBA 7a loan program is $5 million. There’s no minimum amount. During the SBA’s 2015 budget year, the average amount of a 7a loan was $371,628.

For loans up to $150,000, the SBA guarantees up to 85 percent of the loan amount; for bigger loans, the guarantee is 75 percent. “This guarantee helps offset the bank’s risk on the loan,” says Rosa Scharf, SBA “champion” at Howard Bank in Ellicott City, Maryland.

The length of an SBA 7a loan is up to 25 years for real estate, up to 10 years for equipment, and normally up to seven years for working capital, according to Entrepreneur.com.

Another type of 7a loan—the SBA Express loan—is another option. In exchange for the SBA guaranteeing just 50 percent of the loan, the agency speeds up the approval period (just 36 hours). The maximum amount of an SBA Express loan is $350,000, with a maximum term of seven years. Interest rates for these loans differ from those for normal SBA 7a loans.

Scharf recommends applying for a 7a loan from an SBA-preferred lender. This means the lender has expertise in SBA loans and does not have to seek a guarantee for every SBA loan.

“This makes the process smoother and shorter,” Scharf says. “As with any government program, the paperwork and requirements are extensive, so having an experienced lender to navigate this process can mitigate the speed bumps and delays.”

Documentation for an SBA 7a Loan

This is just some of the paperwork that’ll have to be submitted:

SBA loan application
business overview and history
profit-and-loss statement
one-year projection of income and finances
three years of business and personal tax returns
resumes for each principal of the business
statements about your personal history and personal finances

SBA 7a Loan Eligibility

Scharf says banks and private lenders extend SBA 7a loans to small businesses that otherwise probably couldn’t qualify for a conventional business loan.

Anthony Piccone, president and CEO of 7th Level Mortgage in Cherry Hill, New Jersey, says that to qualify for an SBA 7a loan, a business must:

Be small, as defined by the SBA.
Operate as a for-profit venture.
Do business in the United States or its territories.
Have a reasonable amount of equity invested in the business.
Use other financial resources, including personal assets, before seeking financial assistance.
Be able to demonstrate a need for the loan proceeds.
Use the money for a “sound” business purpose.
Not be delinquent on any existing debt with the federal government, such as taxes or student loans.
Piccone recommends that if you’re applying for an SBA 7a loan, you should put together a detailed business plan, and you should save as much money in an advance to demonstrate that you have “skin the game.”

Jason Lumpkin, general manager of emerging markets at Live Oak Bank in Wilmington, North Carolina, says small businesses often encounter two obstacles when they’re applying for an SBA 7a loan:

A business lacks “clean, clear, concise financials.” For instance, the business’ financial statements aren’t in great shape, or the business can’t explain why its revenue is down 10 percent year over year.
A business lacks “forward-looking projections.” For instance, a business should be able to pinpoint how a planned expansion of its space or the purchase of a piece of equipment will contribute to increased revenue.
Keep in mind that a lender will take into account your personal credit history when you’re seeking an SBA 7a loan for your business.

In considering an applicant for an SBA 7a loan, “cash flow is king,” Lumpkin says, but personal credit history is next in line. Personal credit history underscores a business owner’s character as a borrower.

“If somebody’s got wonderful cash flow, that’s great,” he says. “But if they’ve got poor credit and just haven’t shown the ability to repay their debt, it doesn’t matter if they’ve got the cash flow to pay for it. If they’ve chosen not to repay it previously, that would be a huge red flag.”

SBA 7a Loan Rates

As with a home loan or auto loan, interest rates for SBA 7a loans vary.

The SBA says the interest rate for a 7a loan is negotiated between the applicant and the lender. Both fixed-rate and variable-rate loans are available, based on the length and amount of a loan.

The maximum interest rate for an SBA 7a loan comprises two parts: the base rate and the “spread” rate.

The base rate is determined in one of three ways: a prime rate published in a daily national newspaper, such as the Wall Street Journal; the one-month London InterBank Offered Rate (LIBOR), plus 3 percent; or the SBA PEG Rate.

For a loan term of less than seven years, the maximum spread rate—an amount tacked on by the lender—is 2.25 percent. It’s 2.75 percent for a loan term of at least seven years. Loans that are less than $50,000 have higher maximum spread rates.

If you add up the base rate and the spread rate, the maximum interest rate for an SBA 7a loan in July 2017 would have been roughly 6 to 9 percent.

Benefits of the SBA 7a Loan Program

The SBA says the 7a loan program offers longer payment periods and potentially lower down payments (as low as 10 percent) compared with other business financing options.

In addition, some of the lending standards for SBA 7a loans are less strict than those for traditional small business loans. For instance, the lender for a traditional loan typically requires that a business has been around for at least three years. However, through the 7a program, a startup with no business history can qualify for a loan.

Another benefit of a 7a loan is that the SBA prohibits many of the fees you’d find with other loans, including processing, origination, application, and brokerage fees. The SBA charges approved lenders a guaranty fee and a servicing fee for each loan, but a lender can pass along only the one-time guaranty fee—ranging from 3 percent to 3.75 percent of the SBA-guaranteed amount—to the borrower.
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