7 min read
In their book Start your own business, the staff of LikendisLike Media Inc. guides you through the essential stages of starting your business, then helps you survive the first three years as a business owner. In this edited excerpt, the authors offer a brief description of the different types of loans that you can get from the SBA.
Where can you go when private funding sources refuse you? For many start-up entrepreneurs, the answer is the United States Small Business Administration (SBA), whose loans often have less stringent capital and collateral requirements than commercial loans, making SBA a excellent source of funding for startups. In addition, many SBA loans are for smaller amounts than most banks are willing to lend.
Of course, that doesn’t mean that the SBA is giving money. In fact, it does not make direct loans; instead, it offers loan guarantees to entrepreneurs, promising the bank to repay a certain percentage of your loan if you are unable to do so.
The SBA can help you prepare your loan dossier, which you then submit to the banks. If the bank approves you, it submits your loan dossier to the SBA. Applications submitted by lenders are usually reviewed by the SBA within several days to two weeks.
The SBA offers a wide variety of business loan programs at different stages of development. Here is a closer look.
1. 7 (a) Loan program.
The main and most flexible SBA loan program is the 7 (a) loan program. For this loan, the SBA offers maximum guarantees of up to $ 5 million or 75% of the total loan amount, whichever is less. The average loan in 2020 was $ 337,730. For loans under $ 150,000, the maximum guarantee is 85% of the total loan amount. The SBA policy prohibits lenders from charging most of the usual fees associated with commercial loans. However, 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. The fees for small loans can be as low as zero percent.
A 7 (a) loan can be used for many business purposes, including real estate, expansion, equipment, working capital and inventory. The money can be repaid over a period of up to 25 years for real estate and equipment, and 10 years for working capital. Interest rates vary depending on the type of loan you are applying for.
Program 7 (a) also offers several specialized loans. One of them, the SBA Express program, promises prompt processing for amounts less than $ 350,000. SBA Express can get you a response quickly, because SBA Express approved lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50% of SBA Express loans.
For companies that need short-term or cyclical working capital, the SBA has a collection of revolving and non-revolving lines of credit called CAPLines. A revolving loan is similar to a credit card, with which you carry a balance that goes up or down, depending on the payments and the amounts you borrow. With non-revolving lines of credit, you borrow a fixed amount and repay it over a defined period of time.
CAPLine loans offer business owners short-term credit, with secured loans up to $ 5 million. There are four loan and line of credit programs that operate under the umbrella of CAPLines:
1. Seasonal line of credit: Designed to help businesses during peak seasons when faced with increased inventory, customer accounts and labor costs
2. Contractual line of credit: used to finance the costs of labor and materials involved in the execution of contracts
3. Manufacturer line program: provides financing to small entrepreneurs or real estate developers for the construction or rehabilitation of residential or commercial properties that will be sold to a third party. The term of the loan is generally three years but can be extended up to five years to facilitate the sale of the property.
4. Working capital line of credit: a revolving line of credit (up to $ 5 million) that provides short-term working capital. The companies that generally use these lines offer credit to their customers or have inventory as their main asset.
3. Prequalification program.
The SBA Prequalification Loan Program helps prequalify borrowers in underserved markets, including women entrepreneurs. Under the program, with the help of private intermediary organizations chosen by the SBA, eligible entrepreneurs prepare a business plan and fill out a loan application. The intermediary submits the request to the SBA.
If the application is approved, the SBA will issue you a pre-qualification letter, which you can then bring with your loan file to a commercial bank. With the SBA guarantee attached, the bank is more likely to approve the loan.
4. MicroLoan program.
The MicroLoan program helps entrepreneurs get very small loans, up to $ 50,000. The average loan in 2020 was $ 13,000. 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 debts or to buy real estate. This program is unique in that it helps borrowers who generally do not meet the credit standards of traditional lenders.
Micro-loans are administered by non-profit intermediaries, who receive loans from the SBA, then turn around and provide loans to entrepreneurs. Small businesses applying for MicroLoan financing may be required to undergo business management training before a loan request is considered. The maximum term of MicroLoans is six years and interest rates vary.
5. CDC / 504 loan program.
Loan 504 provides long-term, fixed-rate loans to finance fixed assets, typically real estate and equipment. Loans are most often used for growth and expansion. 504 Loans are made through certified development companies (CDCs), nonprofit intermediaries who work with the SBA, banks, and businesses seeking financing.
If you are looking for funds of up to $ 1.5 million to buy or renovate a building or install major equipment, consider approaching a CDC. The typical percentages for this type of package are financed 50% by the bank, 40% by the CDC and 10% by the company.
In exchange for this below-market fixed rate funding, the SBA expects small businesses to create or maintain jobs or achieve certain public policy objectives. The companies that achieve these objectives are those whose expansion will contribute to the revitalization of a business district, such as an empowerment zone; a company belonging to a minority; an export or manufacturing company; or a company whose expansion will contribute to rural development.
If your business is for job creation, the SBA program will lend up to $ 5 million to meet job creation criteria or a community development goal. As a general rule, your business must create or keep a job for every $ 65,000 provided by the SBA, with the exception of small manufacturers, who have a job creation or retention goal of $ 100,000, in accordance program guidelines.
6. 8 a) Business development program.
The SBA’s Program 8 (a) is a small business set-aside program that allows socially and economically disadvantaged certified businesses to enter the federal public procurement market as well as the economic market. Program 8 (a) is a start-up program for companies belonging to minorities, which must leave the program after nine years.
LikendisLikes participating in program 8 (a) are eligible for the guarantee loan 7 (a) and the prequalification programs. Companies must belong to a socially and economically disadvantaged person. Socially disadvantaged categories include race and ethnicity. Participants can receive sole source contracts, up to $ 4 million for goods and services and $ 6.5 million for manufacturing. To be considered economically disadvantaged, you must have a net worth of less than $ 250,000, assets of less than $ 4 million, as well as two years of income tax reporting. There are other qualifications, including that the business must be at least 51% owned by the applicant for the program and that the owners must demonstrate good character.
7. Export working capital program.
If you plan to export, you should study the working capital export program. This allows for a 90% guarantee on loans up to $ 5 million. The term of the loan is one year; funds can be used to finance transactions. Funded exports must be shipped and labeled from the United States. Loans are usually processed quickly.