How Do I Get a SBA Loan?
What is the SBA?
The U.S. Small Business Administration (SBA) is a federal agency, created in 1953, responsible for assisting and protecting the interests of American small business. The agency operates through a series of field offices around the country – as well as in partnership with public and private organizations – to offer such things as technical assistance (how to do business overseas; how to teach your workers new skills), contracting assistance (how to bid on government jobs), and other areas of importance to small business owners. These might include recovering from natural disasters, complying with civil rights laws, or helping young entrepreneurs get a business off the ground. But the main reason most people approach this agency is to obtain an SBA business loan – either as start-up funding or for financial assistance to expand an existing business.
What Are SBA Loans?
With no sense of irony whatsoever, it is not possible to obtain an SBA business loan unless you have been rejected in your application for a conventional loan. In order to keep this government agency from unfairly competing with commercial lending institutions – banks, credit unions, and so on – the law states that the SBA may not guarantee a loan if the customer can secure one “on reasonable terms” from some private source. There are a number of different types of SBA loans available to the business owner, depending upon the size of the loan, the use to which it will be put, and other factors. Here are some examples:
- 7(a) Loan Guarantee Program – For loans up to $2 million
- Micro-Loan Program – Up to $35,000, generally arranged through non-profit, community-based lenders
- 504 Loan Program – Long-term, fixed-rate funding specifically earmarked for real estate purchases, or the acquisition of machinery or equipment to expand or modernize an operation
- Disaster Recovery Program – Only granted when the federal government has declared a place an official disaster area, such as with the Mississippi Gulf Coast following Hurricane Katrina.
How Do I Apply for an SBA Loan?
It should be further noted that the agency does not actually write checks to provide SBA business loans. Rather than acting as a direct lender, they work as a loan guarantor with institutional partners. In some cases, you may actually obtain an SBA-guaranteed loan from the very same entity that turned you down for a conventional loan. There are still a number of hoops to jump through, of course, in order to qualify. You will need to present a strong business plan, with verifiable numbers that show your ability to pay back the loan over the agreed-upon loan period, furthermore showing your ability to run a business well – and especially this business. You will have put some of your own money on the line as well, since the SBA wants to see you properly “invested” in its success. Your credit rating must be good, and you will need to offer some sort of collateral as a further guarantee. This could be real estate or some other form of personal property. An SBA loan application is generally made through one of its partner institutions, or at a local field office.
SBA Loan Rates
Before applying for a business loan, it’s always good to have some idea what the process will cost you. In nearly all cases, SBA loan rates are a function of the amount being lent, the length of loan term, and some multiple of the prime interest rate as established on Wall Street. The exception to this rule involves the disaster recovery program, where a special rate is granted for a limited period of time. Below are a few examples, courtesy of banking giant Wells Fargo’s Web site. Because SBA business loans are federal in nature, the rates are the same no matter which lender is involved.
- SBA Express Loan – Less than $50,000 = N.Y. Prime plus 6.5 percent; more than $50,000 = N.Y. Prime plus 4.5 percent
- SBA 7(a) Loan (maximum value $2 million) – Loan term less than seven years = N.Y. Prime plus 2.25 percent; loan term seven years or longer = N.Y. Prime plus 2.75 percent
- SBA Patriot Express Loan (maximum value $500K, specifically designed for armed forces veterans) – Same terms as 7(a) loan above.
Please note that all SBA loan rates are subject to change without notice. Be sure to check with your community banker or SBA field office for current numbers and available programs.
09/03/09 at 06:09 PM
GOODWILL CAP ELIMINATED
Per the new edition of SBA’s Standard Operating Procedures (SOP 50 10 5B), posted yesterday afternoon on the SBA website, and effective October 1, 2009, there will no longer be any special limit on the amount of loan proceeds used to finance goodwill.
Since March 1, 2008 the SBA has prohibited using more than $250,000 or 50% of loan proceeds (whichever is less) for financing goodwill. Under the new rules, any amount of goodwill up to the overall lending limit of $2 million may be financed, and may be approved under delegated authority by a Preferred Lender participating in the SBA’s 7(A) loan program, so long as there is at least 25% equity provided in any combination of borrower down payment and seller stand-by financing.
This is a signal accomplishment for all those many of you who contacted SBA, your associations, and members of Congress to roll back a rule that has, for much of this year, curtailed the use of SBA financing for purchasing a small business. The new rules make acquisition financing easier for borrowers, provide clarity for lenders, and significantly increase availability of SBA financing at a time when it is needed more than ever.
In summary, the new rules provide that:
1) If total intangible assets in the purchase price of a business (including but not limited to goodwill, client/customer lists, patents, copyrights, trademarks and non-compete agreements) are $500,000 or less in value, such intangibles may be financed using the SBA guarantee, and loan requests may be processed under the Preferred Lender Program (i.e., with the Lender having delegated authority to make the credit decision, without SBA review of the loan file.)
2) If total intangible assets in the price exceed $500,000, then in order to use PLP processing, the borrower and/or seller must provide at least 25% of the purchase price in equity, defined as any combination of borrower cash injection plus seller financing that is on full stand-by for at least 2 years (no payments of principal or interest).
3) If total intangible assets in the price exceed $500,000 and borrower/seller equity is less than 25%, the loan request may still be processed but must be submitted via the Certified Lender Program or General Program, which require SBA’s separate review and approval of the complete loan file.