Small Business Administration Loans

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What is the SBA?

Good question! The SBA is a federal agency that provides access to capital and credit through a loan guarantee program. It's essentially set up as an on-going economic stimulus program.

The SBA helps with refinancing existing loans, real estate purchases and the expansion or creation of new businesses. There are different guidelines for different industries but 97% of all U.S. businesses qualify for small business loans. While almost all businesses qualify this is still the first question to ask when you talk to an experienced SBA lender, do you qualify?

The limit for the SBA's 7A program is $2 million with terms to 25 years depending on the purpose of the loan and the collateral used to secure it. With the SBA's 504 program, you can borrow up to $5 million with terms to 25 years for the purchase of owner-occupied commercial real estate or to make a large capital purchase of equipment.

The SBA isn't magic.

Even with the SBA loan guarantee, a good credit rating and the ability to repay the load are essential. The loan guarantee encourages lenders to give you the loan or give you a larger loan than they would without it. That's because it reduces their exposure to certain types of credit risk such as longer repayment terms and higher loan-to-values on collateral.

In other words, SBA loan guarantees make it reasonable for the lenders to let you have longer to pay and to get larger loans than you would on your own. But you still have to pay it all back.

The SBA doesn't actually loan you the money.

Regular banks and other financial institutions do most SBA lending. Although, in certain types of national disasters, the SBA functions as a lender on behalf of the Federal Emergency Management Administration (FEMA).

When a loan is made the SBA issues a guarantee to the lender of 75% of the loan amount. Certain export loans and loans up to $150,000 may be eligible for 85-90% guarantees. Check with your lender to find out what type of loan guarantee you qualify for.

Paperwork.

You'd think that because the loan is guaranteed by the SBA your bank wouldn't demand quite so much paperwork. Well, you'd be wrong. It will require as much paperwork as any other commercial loan. You will need to provide your lender with three years' tax returns and financial statements, a copy of your business plan and some financial projections.

Any other advantages to an SBA loan?

Yes. SBA loans are often less expensive than regular commercial loans. There are two reasons for this. The first is because an SBA loan guarantee lowers the risk for the lender so they lower the rate for you. The second reason is a little technical: if you borrow to buy or refinance commercial real estate there is usually a large balloon payment due at the end of five or ten years. When the balloon payment comes due you, the borrower, will typically have to again pay the costs of refinancing (appraisals, environmental reports, points, recording fees). With an SBA loan there are no balloon payments, so you only have to pay these costs once, at the beginning of the loan.