What is an SBA Loan? Everything You Need To Know

Where Can You Go When Personal Financial Sources Turn You Down for a Business Loan? For the small business owner, the answer is usually the US Small Business Administration (SBA). The federal government has a vested interest in encouraging the growth of small businesses. As a result, some SBA loans have less stringent requirements for owner’s equity and collateral than business loans, making SBAs an excellent financing source for startups. In addition, many SBA loans are for small amounts, whereas most banks are willing to lend.


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Of course, that doesn’t mean the SBA is paying money. In fact, the SBA doesn’t actually offer direct loans; Instead, it provides an SBA guaranteed loan to entrepreneurs, with the bank promising to return a certain percentage of your loan if you are unable to do so.

Banks participate in the SBA program as a regular, certified or SBA preferred lender. The SBA can help you design your small business loan package, which you submit to banks. If the bank approves you, it submits your loan package to the SBA. Applications submitted by regular lenders are reviewed by the SBA in an average of two weeks, certified SBA lender applications are reviewed in three days, and approval is even faster through a preferred SBA lender.

The most basic SBA eligibility requirement for SBA loans is the ability to repay the loan by cash flow, but SBA lending also looks at personal credit history, industry experience, or other evidence of manageability, collateral, and owner’s equity contributions. If you have 20 percent or more equity in the business, the SBA asks you to personally guarantee the loan. After all, you cannot ask the government to support you if you are not ready to support yourself. Offers a wide variety of SBA loan Programs for businesses in different stages of development. Here’s a closer look:

7(a) Guarantee loan Program

The primary and most flexible SBA loan program is 7(a) Loan Program,

The SBA does not lend money itself, but does provide a maximum loan guarantee of up to $5 million or 75 percent of the total loan amount, whichever is less. For loans under $150,000, the maximum guarantee is 85 percent of the total loan amount. The SBA policy prohibits lenders from charging many of the common fees associated with commercial loans. Still, you can expect to pay a one-time guarantee fee, which the agency charges the lender and allows the lender to pass on to you.

SBA 7a loans can be used for many business purposes, including real estate, expansion, equipment, working capital and inventory. The money can be paid for up to 25 years for real estate and equipment and up to 10 years for working capital. Interest rates vary with the type of loan you apply for.

sbaexpress program

A general 7(a) loan may best suit the needs of your business, but the 7(a) program also offers a number of specific loans. one of them, sbaexpress program, promising quick processing for amounts less than $350,000. SBAExpress can get you an answer quickly because approved SBAExpress lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without waiting for SBA approval. The SBA guarantees up to 50 percent of the SBA Express loan.

caplines

For businesses that need working capital loans on a short-term or cyclical basis, the SBA has a collection of revolving and non-revolving lines of credit called caplines, A revolving loan is similar to a business credit card, with you carrying a balance that goes up or down depending on the payment and amount you borrow. With non-revolving lines of credit, you borrow a flat amount and repay it over a set period.

SBA CAPlines offers short-term loans to business owners, with guaranteed loans up to $2 million. There are five loan and loan-category programs that operate under the Caplines umbrella:

1. Seasonal Line of Credit: Designed to help businesses during peak seasons, when they are faced with increased inventory, accounts receivable and labor costs.

2. Contract Line of Credit: Used to finance labor and material costs involved in fulfilling contracts.

3. Standard Asset-Based Line of Credit: Helps businesses unable to meet the creditworthiness associated with long-term credit; Provides financing for cyclical, growth, recurring, or short-term needs

4. Small Asset-Based Revolving Line of Credit: Provides a smaller, asset-based revolving line of credit (up to $200,000), with requirements that are not as strict as a standard asset-based program.

5. Builders Line of Credit: Used to finance labor and material costs for small general contractors and builders who are building or renovating commercial real estate or residential buildings.

Each of the five credit lines has a maturity of up to five years, but can be tailored to the needs of the borrower.

micro credit program

SBA financing is not limited to the 7(a) group of loans. micro credit program Helps entrepreneurs get very small loans up to $35,000. Loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies and working capital, but they cannot be used to pay off existing loans or purchase real estate. This program is unique in that it assists borrowers who typically do not meet the credit approval standards of traditional lenders.

Microloans are administered through non-profit intermediaries. These organizations obtain loans from the SBA and then in turn give loans to entrepreneurs. Small businesses applying for micro-loan financing may be required to complete certain business-skills training before a loan application can be considered.

The maximum term loan for MicroLoans is six years, and the interest rates vary.

CDC/504 loan Program

On the opposite end of the loan size is the spectrum SBA 504 Loan, which provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. Loans are often used for growth and expansion.

504 loans are made through Certified Development Companies (CDCs) – non-profit intermediaries that work with SBAs, banks and businesses looking for funding. There are CDCs across the country, each covering a designated area.

If you are seeking funding of up to $5 million to purchase or renovate a building or to install certain major equipment, consider bringing your business plan and financial statements to the CDC. Typical percentages for this type of package are 50 percent funded by the bank, 40 percent by the CDC, and 10 percent by the business.

In exchange for this below-market, fixed-rate funding, the SBA expects the small business to create or maintain jobs or meet certain public policy goals. Businesses that meet these public policy goals are those whose expansion will contribute to the revitalization of a business district, such as an empowerment zone; minority-owned business; an export or manufacturing company; Or a company whose expansion will contribute to rural development.

hubzone program

Since 1980, 40 states have established programs to designate enterprise areas, providing tax breaks and other incentives to businesses located in certain economically disadvantaged areas. States vary widely in the number of designated areas, the proposed incentives, and the success of the programmes. In some areas, businesses may qualify for lower utility rates or lower interest financing from eligible government jurisdictions. To be eligible for any of these incentives, businesses generally must meet certain criteria, such as creating new jobs in a community.

hubZone program It was established to provide tax incentives and encourage community investment and development. Designated urban and rural communities will receive grants and tax breaks for businesses in the area. The involvement of the federal government means that entrepreneurs in those areas can get federal tax exemptions, not just the state.

If you choose to locate in an enterprise or empowerment sector, look beyond tax breaks to consider long-term concerns such as workforce availability and the reach of your target market. Make sure the zone provides other support services, such as streamlined licensing and permitting processes. Most sectors that are successful have high growth potential, initially, with good highway access, a solid infrastructure and a trained labor force.

For more information about enterprise areas, contact your state’s Department of Economic Development or call HUD’s Office of Community Renewal at (202) 708-6339.

8(a) Business Development Program

SBA’s 8(a) program A small-business set-aside program that allows certified socially and economically disadvantaged companies to enter the federal procurement market as well as the economic mainstream. The 8(a) program has been viewed as an introductory program for minority businesses, who must leave the program after nine years.

Entrepreneurs who participate in the 8(a) program are eligible for 7(a) guaranteed loans and pre-qualification programs. Businesses should be owned by socially and economically disadvantaged persons. Socially disadvantaged categories include race and ethnicity. To qualify as financially disadvantaged, the individual must have a net worth of less than $250,000 as well as a two-year tax return.

export working capital program

If you are planning to export, you should check export working capital program, It gives a 90 percent guarantee on loans up to $2 million. The loan maturity is one year, and the funds can be used to finance the transaction. Financed exports must be shipped and titled from the United States.

special purpose loan

If you think you have one special case For those that require extra help, you may be in luck. Of course, keep in mind that everyone assumes they deserve additional help with financing, but in many situations, the SBA has a loan program tailored to your situation. For example, if you’re starting a business that pollutes the environment, but you plan to spend extra money to reduce the toxins being put into the air, soil, or water, you can Might be eligible for one. pollution control loan, which is basically a 7(a) loan earmarked for businesses that are planning, designing or installing a pollution control facility. The facility must prevent, reduce, reduce or control any type of pollution, including recycling.

If your business plans to be active in international trade or your top competition is cheap imports, the International Trade (IT) loan program is something you should look into. The SBA can guarantee up to $1.75 million for fixed-asset financing (amenities and equipment) or refinancing of existing loans for similar purposes. Working capital cannot be part of IT loan.

Several variations of SBA general small business loans are made available to meet specific needs, including a disaster loan To help businesses in the wake of the crisis. So if you think your business might fall into a category in which the SBA can provide you with additional loans, this is definitely a way to check.

This article is an “edited excerpt from”Start Your Own Business, Fifth Edition“Published by Entrepreneur Press.