What Are SBA Loans?
Small Business Administration Loans, also known as SBA loans, are for small business owners. There are guidelines and requirements for a small business owner to qualify for SBA loans.
The creation of the Small Business Administration was in 1953 by the United States Congress. The SBA is a federal government agency which has been launched to assist millions of small business owners in getting them funding to run and operate their businesses. The Small Business Administration is not a mortgage lender and does not create or originate loans. The SBA’s role and function is to establish business lending guidelines and guarantee small business loans made by private small business lenders such as banks, mortgage companies, and investors. The SBA is somewhat like FHA where it guarantees the private business mortgage lenders against default as long as the mortgage loan is a SBA loan and meets SBA mortgage lending guidelines. The Small Business Administration makes small business lending possible where otherwise it would not have been possible for the small business owner. SBA is somewhat of a co-signer for small business owners seeking financing for their businesses.
Small Business Loans: High Risk Loans
Most private lenders view small business loans as extremely high risk loans. Small businesses do not have the credit and capital as larger businesses. Most small business owners are mom and pop shop who are good at what they do but are not business savy in terms of getting lines of credit, outsourcing, or doing financial research analysis or market analysis like larger businesses and corporations do.
SBA Loans: SBA Mortgage Lending Guidelines
• SBA Loan borrowers need to try other private lending sources before applying for a SBA loan. The Small Business Adminstration wants you to try to get financing on your own via regular non SBA lending sources and if you get turned down, you will qualify for a SBA back business loan.
• SBA’s size minimum guidelines. Your small business needs to meet SBA standards and guidelines set for particular businesses and industry with respect to sales, revenues, and amount of employees.
SBA loans can normally be used for renovating the property the business is located, purchasing machinery and equipment, working capital, and other costs associated with running a business.
SBA LOANS PROGRAMS
1. 7 (a) SBA Loan: This SBA loan program is probably the most popular and commonly used SBA loan program by small business owners. The 7 (a) SBA loan program created to bes used to help new businesses and existing small businesses when these businesses cannot get funds through traditional commercial lending channels. This type of SBA loan was named for the 7 ( a ) Section of the Small Business Act. This type of SBA loan is very flexible due to the fact that it can be used for numerous of reasons such as aquisition of new equipment, furniture, properties, capital, inventory, reserves, and other purposes in operating and managing the day to day operations. Terms for this type of SBA loans are normally 10 years for working capital and 25 years for fixed capital assets. The Small Business Administration’s cap for these loans is $1.50 million. The SBA normally backs up to 75% of a 7 ( a ) loan so the bottom line is that a small business owner can borrow up to $2.0 million from a SBA approved business lender.
2. Certified Development Company/504 Loan Program
The CDC/504 SBA loan program offers business loans to small businesses with financing for the purchase of real estate or equipment such as machinery to expand their businesses or to modernize their current business. A private mortgage lender will normally lend up to 50% of the business loan amount. A certified development company, which is a private non for profit organization which helps economic development will lend up the additional 40% of the small business loan and the SBA loan borrower will come up with 10%. A SBA loan borrower needs to come up with a minimum of 10% of the equity. The borrower must contribute at least 10 percent equity. For those purchasing owner occupant real estate, they need to occupy 51% of the property and can lease the 49% out.
3. Microloan Program
For small businesses needng smaller, short term business loans, the SBA Mircroloan program might be the perfect solution. These short term business loans are normally capped at $35,000 maximum loan amount.
SBA Loan Application Process
To apply for a SBA loan, you need to contact a commercial mortgage broker who handles SBA loans. Your commercial lender will have you complete a mortgage application, run credit, ask you for a detail business plan and what your intentions are, three year tax returns ( business and personal ), bank statements, profit and loss, financials, and personal financial statement.