Small Business Resource Guide - SBA Loans
SBA loan programs are generally intended to encourage longer-term small business financing, but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed.
However, maximum loan maturities have been established: 25 years for real estate; up to 10 years for equipment (depending on the useful life of the equipment); and generally up to seven years for working capital. Short-term loans are also available through the SBA to help small businesses meet their short-term and cyclical working capital needs.
Terms of loans may very from lender to lender, but there are two basic types of loans: short-term and long-term. Generally, a short-term loan has a maturity of up to one year. These include working-capital loans, accounts-receivable loans and lines of credit.
Long-term loans have maturities greater than one year but usually less those seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.
Preferred & Certified Lenders Program (PLP/CLP)
Coldwell Banker refers our customers primarily to (PLP)
The most active and expert lenders qualify for the SBA's Certified & Preferred Lenders Program. Participants are delegated partial or full authority to approve loans, which results in faster service. Preferred lenders are chosen from among the SBA's best lenders and enjoy full delegation of lending authority.
This authority must be renewed at least every two years, and the lender's portfolio is examined by the SBA periodically. Certified lenders are those that have been heavily involved in regular SBA loan-guaranty processing and have met certain other criteria. They receive a partial delegation of authority and are given a three-day turnaround on their applications (they may also use regular processing).
Obtaining a Loan
The PLP will provide a complete application packet to be filled out. There will be preliminary information to obtain a conditional approval and then the complete package is submitted for approval.
What the Package Requires
Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loan they know will be repaid.
A good loan proposal will contain the following key elements:
- Business name, names of principals, Social Security number for each principal, and the business address.
- Purpose of the loan--exactly what the loan will be used for and why it is needed.
- Amount required--the exact amount you need to achieve your purpose.
- History and nature of the business--details of what kind of business it is, its age, number of employees and current business assets.
- Ownership structure--details on your company's legal structure.Management Profile
- Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments.
- Clearly define your company's products as well as your markets.
- Identify your competition and explain how your business competes in the marketplace.
- Profile your customers and explain how your business can satisfy their needs.
- Financial Statements--balance sheets and income statements for the past three years. If you are starting out; provide a projected balance sheet and income statement for three years.
- Personal financial statements on yourself and other principal owners of the business.
- Collateral you would pledge as security for the loan.
How Your Loan Request will be Reviewed
When reviewing a loan request, the lender is primarily concerned with repayment. Loan officers judge loan applications based on what is commonly referred to as the five C's of Credit.
- Character: Lenders will order a copy of your credit report and look at debt repayment trends. They want to know simply if you pay your bills and if you pay them on time. If there are blemishes on your report, explain them.
- Cash Flow: Lenders will look at historical and projected cash flow statements to determine whether you will be able to repay the loan and still have money to adequately run the business. Include written justification for your projections in your loan proposal.
- Collateral: Collateral is an asset (something you own) which a lender may claim to satisfy a loan in the event the loan is not repaid according to the required terms. Often the assets purchased with the loan may serve as collateral. If the business does not have enough collateral, the bank will look to personal assets.
- Capitalization: Capitalization refers to the basic resources of the company including owner's equity, retained earnings, and fixed assets. You do not have to be fully capitalized to qualify for a loan.
- Conditions: Factors that affect the success of the company yet are external to the business will also be considered by the lender. Examples include government regulation, competition, and industry trends.
SBA Financial Assistance Programs
The major concern for today's small business owners is access to capital and credit. The SBA's loan guaranty programs provide a key source of financing for viable small businesses that have real potential, but cannot qualify for loans from traditional sources. SBA guaranties, provided through private lenders and nonprofit lending institutions, give small business owners access to the same kinds of reasonably priced, long-term financing available to large businesses by virtue of their size and economic clout.
Financing programs provided by SBA vary according to a borrower's financial need. SBA loans are made by private lenders and are guaranteed up to 85 percent. There are three principal players in an SBA-guaranteed loan--the small business borrower, the private lender and the SBA. First, the private lender determines whether a borrower's application is acceptable. If it is, the lender forwards the application and its credit analysis to the SBA. After SBA review and approval, the lender makes the loan and disburses the funds to the borrower to make payments to the lender. The following outlines major programs offered by the SBA.
7(a) Loan Guaranty Program
The 7(a) Loan Guaranty Program is the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.
The eligibility requirement and credit criteria of the program are very broad in order to accommodate a wide range of financing needs. When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lending institution for a portion of its loss.To qualify for an SBA guaranty, a small business must meet the 7(a) criteria, and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty. The SBA can then guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. In most cases, the maximum guaranty is $2 million. Exceptions are the International Trade, DELTA and 504 loan programs, which have higher loan limits.
By providing this guaranty, the SBA is able to help tens of thousands of small businesses every year get financing they would not otherwise obtain.
How it Works
You submit a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds.
You make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Prepayment fees are permitted on loans with maturities of 15 years of longer.
Use of Proceeds
You can use a 7(a) loan to: expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivable and augment working capital; refinance existing debt with compelling reason; finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.
Terms, Interest Rates and Fees
The length of time for repayment depends on the use of the proceeds and the ability of your business to repay: usually five to 10 years for working capital and up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment (not to exceed the useful life of the equipment).
Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25 percent over the lowest prime rate (all references to the prime rate refer to the lowest prime rate as published in the Wall Street Journal on the day the application is received by the SBA) for loans with maturities of less than seven years and up to 2.75 percent for seven years or longer. For loans under $50,000, rates may be slightly higher.
The SBA charges the lender a nominal fee to provide a guaranty, and the lender may pass this charge on to you. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with a maturity of one year or less, the fee is just 0.25 percent of the guaranteed portion of the loan.
The following fee structure shall be in place for Section 7(a) loans approved on or after October 1, 2003, through September 30, 2004, with a maturity exceeding 12 months (there is no change to the fees for loans with a maturity of 12 months or less).
- A guaranty fee equal to 1 percent of the SBA guaranteed portion of a total loan amount that is not more than $150,000 (lenders may retain not more than 25 percent of a fee collected under this subparagraph).
- A guaranty fee equal to 2.5 percent of the SBA guaranteed portion of a total loan amount that is more than $150,000, but not more than $700,000.
- A guaranty fee equal to 3.5 percent of the SBA guaranteed portion of a total loan amount that is more than $700,000
You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.
Your business generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged overthe previous three years. Loans cannot be made to businesses engaged in speculation or investment.
Maximum size standards
- Manufacturing--from 500 to 1500 employees
- Wholesaling--100 employees
- Services--from $4.0 million to $29 million in annual receipts
- Retailing--from $6 million to $24.5 million
- General Construction--from $16 million to $28.5 million
- Agriculture--from $.5 million to $10.5 million
What to Submit to the Lender
Documentation requirements may vary; contact your lender for the forms and information you must supply. Common requirements on the forms include the following:
- Purpose of the loan.
- History of the business.
- Financial statements for three years (existing businesses).
- Schedule of term debts (existing businesses).
- Aging of accounts receivable and payable (existing businesses).
- Projected opening-day balance sheet (new businesses).
- Lease details.
- Amount of investment in the business by the owner(s).
- Projections of income, expenses and cash flow.
- Signed personal financial statements.
- Personal resume(s).
What the SBA Looks For
- Good character.
- Management expertise and commitment necessary for success.
- Sufficient funds, including the SBA guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to meet start-up expenses and the initial operating phase).
- Feasible business plan.
- Adequate equity or investment in the business.
- Sufficient collateral.
- Ability to repay the loan on time from the projected operating cash flow.
SBA 504 Loan Program
The 504 is the SBA’s economic development instrument that supports American small business growth and helps communities through business expansion and job creation. The 504 loan program provides long-term, fixed-rate; subordinate mortgage financing for acquisition and/or renovation of capital assets including land, buildings and equipment. Virtually all types of for-profit small businesses are eligible for this program.
The 504 program is distinguished from other SBA loan programs in these ways:
- Lower down payment; allows a business to conserve valuable operating capital by injecting just 10 percent of total project cost.
- Fixed interest rate; borrower knows cost of occupancy for the next 20 years.
- Rate is usually below market rate.
- All project costs can be financed, including acquisition (land and building, land and construction of building, renovations, machinery and equipment) and soft costs such as title insurance, legal appraisal, environmental and bridge loan fees. Closing costs may be financed.
- Collateral is typically assets-financed; allows other assets to be free of liens and available to secure other needed financing.
- Long-term; real estate loans are 20-year term; heavy equipment 10 or 20-year term and are self-amortizing.
- 504 program benefits the borrower’s community through job creation and retention.
- Business that receive 504 loans are:
- Small-net worth under $7 million, net profit after taxes under $2.5 million, or meet other SBA size standards.
- Organized as for-profit.
- Any type of business – retail, service, wholesale or manufacturing.
contact us for any questions regarding SBA Loans.