If you have plans to start a business or expand an existing business, you might need financing help. The Small Business Administration (SBA) participates in a number of loan programs designed for business owners who may not qualify for a traditional bank loan.
The SBA can be an attractive source for capital. There are numerous requirements for SBA loan application, as well as additional reporting requirements. If you are considering applying for a SBA loan, be advised that the process takes approximately 12 to 18 months to complete.
You can ease—and in some cases, shorten—the process by:
- Providing proper documentation and accurately completed applications
- Working with a bank or other lender that is familiar with the SBA process
The Most Common Type of SBA Program: 7(a) Guaranteed Loans
The most common form of SBA loan is a 7(a) guaranteed loan. This loan is made by a private lender (often a bank), and the SBA provides a guarantee on 75% of the amount of the loan. There are some maximum business size restrictions on these loans. For example, a retail or service company could have at least $6 million in sales (and perhaps up to $29 million) and still be eligible. A wholesaler can have up to 100 employees and still qualify.
The maximum amount that the SBA will guarantee is $1,500,000, and therefore the maximum loan amount is $2 million. The interest rate on SBA 7(a) loans is tied to the prime rate. For loans with a term of 7 years or more, the rate can be up to 2.75% above prime. For loans shorter than 7 years, the rate can be up to 2.25% above prime.
While there are some restrictions on the use of loan proceeds, generally proceeds can be used in the normal course of business.
Allowable uses of loan proceeds include the following:
- Purchase real estate to house the business
- Construction, renovation or leasehold improvements
- Acquisition of furniture, fixtures and equipment
- Purchase of inventory
- Working capital
Applying for an SBA loan requires completing various documents and may require collateral or personal guarantees. Lenders may also charge some origination fees.
SBA loans can be a useful source of needed capital for many small businesses. Interest rates are generally a couple or percentage points over prime, and repayment terms can be negotiated.
If you are considering a SBA loan, be prepared to spend some time and effort. Being well organized, having patience and working with an experienced SBA lender can make the process less burdensome.