Business owners often think that U.S. Small Business Administration loans are funded by the government. They’re not. SBA loans are made by commercial lenders who only receive a federal-government guarantee for part of the loan.
When a financial institution reviews a business’s application for a loan, whether or not it is guaranteed by the SBA, the most important factor is the business’s ability to pay back the loan. That may sound like common sense, but many businesses aren’t prepared to show details of their business’s financials when they sit down with a loan officer.
Good character, proven management ability, collateral and significant owner’s equity in the business also are important considerations in a bank’s decision making.
Given the credit tightening by financial institutions, it’s not surprising that the number and dollar amount of SBA loans dropped dramatically during the 2008 fiscal year, which ended on September 30. The SBA guaranteed 4,062 loans in Florida, down 38.8% from 6,644 loans in 2007. The dollar amount of loans fell from $1.32 billion to $1.1 billion, down 18.3%.
SBA Loans 101
7(A) Business Loans (up to $2 million)
This is the SBA’s primary loan program. The maximum loan amount is $2 million, with a maximum loan guarantee of $1.5 million. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000.
Fees are 2% of the guaranteed portion for loan amounts of $150,000 or less, 3% for loans from $150,000 to $700,000, and 3.5% for loans over $700,000. For loans over $1 million, an additional 0.25% guaranty fee will be charged for the portion greater than $1 million. An ongoing servicing fee of 0.494% applies to the guaranteed portion of the loan. Interest rates are negotiated with the lender, but are subject to SBA maximums.
Loan proceeds can be used for fixed assets, working capital, inventory, seasonal line of credit or, in certain situations, for refinancing debt. Real estate may be financed for up to 25 years and working capital loans for seven years.
SBAExpress (up to $350,000)
Lenders use their own forms and processes to approve loans with a maximum guarantee of 50%. Loan term varies.
Interest rates are tied to the Prime Rate, but are negotiated with the lender. For loans of $50,000 or less, lenders may charge up to 6.5% over Prime; for loans more than $50,000, the maximum rate is 4.5% above Prime.
Community Express (up to $250,000)
This pilot program is available in geographic areas serving primarily low- to moderate-income entrepreneurs, generally SBA’s Historically Under utilized Business Zones (HUBZones) and those classified as distressed through the Community Reinvestment Act (CRA). Revolving lines of credit up to seven years are allowed. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. Collateral is not necessarily required for loans up to $25,000. The program also includes technical and management assistance.
Patriot Express (up to $500,000)
This pilot program is available for businesses that are 51% owned by veterans and other military-related personnel. Revolving lines of credit up to seven years (with maturity extensions permitted) are allowed. The maximum guarantee is 85% for loans of $150,000 or less and 75% for loans over $150,000. Lenders are not required to take collateral for loans up to $25,000, may use their existing collateral policy for loans over $25,000 up to $350,000, but must take collateral for loans greater than $350,000.
CDC/504 Loan Program
This program uses long-term financing to finance fixed assets for for-profit businesses with less than $7.5 million in net worth and less than $2.5 million in after-tax profits. The money can be used for assets such as land, buildings, machinery and equipment. Funds cannot be used for working capital, inventory, debt repayment or refinancing.
Typically a bank will loan 50% of the project’s cost, a Certified Development Company (see list of Florida offices below) provides SBA-guaranteed funds for 40% of the total cost up to $4 million for small manufacturers (SBA limit is $2 million for non-manufacturers that meet public policy goals and $1.5 million for non-manufacturers that meet job creation or community development goals) and the remaining 10% comes from the owner’s down payment.
Repayment is up to 20 years for real estate, 10 years for equipment. Interest rates are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Fees total about 3% of the loan.