GlobalBX

In March this year, the Small Business Administration (SBA) placed a limit on the guarantees it was extending on “goodwill” financing, capping them at $250,000, or 50% of the total SBA loan amount, whichever figure was lower. “Goodwill” financing is a part of a SBA business loan that is used to acquire the intangible assets of an existing business. The aforementioned limits were introduced to prevent the inflation of the value of intangible assets. This is just one example of why you have to be prudent about asking for a SBA business loan to fuel your entrepreneurial ambitions. There are several other things you need to know about using SBA loans to finance a business acquisition.

SBA Loan Limits
Getting a SBA business loan is a very widespread method of financing a small business establishment. Essentially, the SBA can provide a bank with a guarantee on a small business loan, so that the bank would be willing to offer such a loan.

There are two main SBA business loan programs:

• 7(a) SBA loan program, the organization’s most flexible and popular initiative, designed to provide SBA commercial loans to small start-up and existing businesses
• CDC/504 SBA loan program, which provides long-term, fixed-rate funding aimed at acquiring fixed assets

These programs have different maximum loan amounts:

• 7(a) loans – $2 million
• CDC/504 loans – from $1.5 million to $4.0 million, depending on the type of business and other criteria

To help small businesses recover from the recession, the Obama administration has recently proposed raising the loan size cap for 7(a) and standard CDC/504 loans to $5 million, and for CDC/504 loans for manufacturers – to $5.5 million. Such an expansion will enable entrepreneurs to undertake larger projects. Congress is now considering this proposal.

SBA Loan Program – SBA Loan Requirements
All applicants have to meet certain requirements to be eligible for a SBA business loan. First and foremost, you must have applied and been turned down for a conventional business loan by a commercial institution. You will not be allowed to apply for SBA business loans if you can acquire funding from another source.

Second, you need to identify the exact program under which you would like to receive a SBA business loan, as different programs have different requirements:

• SBA loan 7(a) will require your business to have the ability to repay the loan from the cash flow in the maximum period of 25 years. In addition, your venture will have to be for profit and meet small business size requirements set by the SBA.
• SBA loan CDC/504 will be accessible if your business operates for profit, does not exceed the size set by the SBA, its net income does not surpass $2,500,000 after taxes, and its net worth is lower than $7,000,000. This loan can only be used for fixed asset projects.

When meeting with a lender, you will need to provide the following information so that your eligibility for SBA loans can be assessed:

• Business profile, including type of business, employee statistics, length of operation etc.
• Loan request, showing purpose, amount and the type of SBA loan
• Description of collateral offered
• Business financial statements for the past three years, including current interim statements
• Personal financial statements of other owners, partners, officers, and major stockholders

SBA Loan Rates
One of the key questions that arise when an entrepreneur is considering a SBA business loan concerns SBA loan rates. Indeed, this issue can be quite complex.

In the case of 7(a) type SBA loans, interest rates are negotiable, but cannot exceed a level set by the SBA. For fixed rate loans, the interest rates are as follows:

• Loans of $50,000 or more – base rate plus 2.25 percent (maturity is less than seven years) or base rate plus 2.75 percent (maturity is seven years or more)
• Loans between $25,000 and $50,000 – base rate plus 3.25 percent or base rate plus 3.75 percent respectively
• Loans of $25,000 or less – base rate plus 4.25 percent or base rate plus 4.75 percent respectively

Rates of CDC/504 SBA commercial loans are pegged to an increment above the market rate for 5-year and 10-year U.S. Treasury issues.

There are also some other SBA loan programs available, but the loans that have been described here should fit almost all of your needs. With U.S. economy slowly climbing out of recession, this is precisely the kind of help small businesses need, don’t you agree?

Looking to buy a business? We have 32,000 Businesses for Sale, Franchises For Sale and Business Opportunities. Check out our Franchise Opportunities and get FREE franchise information today!