This month’s article focuses on Small Business Administration guaranteed loans for small business startups or expansions.
The general small business or 7(a) loan program is the SBA’s primary loan program. It is the agency’s most frequently used financial assistance program because of its flexibility in loan structure, variety of uses for the funds, and availability.
The program has broad eligibility requirements and credit criteria to accommodate business financing needs. The business loans that SBA guarantees do not come from the agency, but rather from banks and other approved lenders. The loans are funded by these organizations and they make the decisions to approve or not approve the applicant’s requests.
The SBA guaranty reduces the lender’s risk of borrower non-payment. If the borrower defaults, the lender can request SBA to pay the lender that percentage of the outstanding balance guaranteed by SBA.
This allows the lender to recover a portion from SBA of what it lent if the borrower can’t make the payments. The borrower is still obligated for the full amount.
To qualify for an SBA loan, a small business must meet the lender’s criteria and the 7(a) requirements. In addition, the lender must certify that it would not provide this loan under the proposed terms and conditions unless it can obtain an SBA guaranty. If the SBA is going to provide a lender with a guaranty, the applicant must be eligible and creditworthy and the loan structured under conditions acceptable to SBA.
Eligible uses of the proceeds from a 7(a) loan include the purchase of land, buildings, equipment, materials, supplies, and even an existing business. Other uses may include long- and short-term working capital as well as refinancing of existing business indebtedness that is not already structured with reasonable terms and conditions.
There are several areas where the use of these funds is not allowed and an SBA approved lender can explain the details.
The SBA’s 504 Loan Program is another way to provide small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. These loans are made available through Certified Development Companies (CDCs) and local lenders.
SBA 504 Loans are typically structured with SBA providing 40 percent of the total project costs, a participating lender covering up to 50 percent of the total project costs, and the borrower contributing 10 percent of the project costs. Under certain circumstances, such as a startup business, the borrower may be required to contribute up to 20% of the total project costs.
More information is available from local lenders and these websites: businessusa.gov and sba.gov.
Gordon Smith is a business specialist at the Small Business Development Center at Clovis Community College.