SBA 7A & 504 Loan Benefits

The Small Business Administration (SBA) was established in 1953 and is a government agency that provides a variety of loan products and services to benefit U.S. based small businesses. The two main loan programs the SBA offers partially guaranty loans made to small businesses by approved and participating lenders, such as banks and finance companies. The guarantees provided by the SBA help lenders make loans to borrowers that would not have access to conventional financing under similar terms and conditions, encouraging them to take a risk on a smaller business.

The SBA 7A loan program is the most popular for helping start-up and existing small businesses. To be eligible for this program, the business must meet size standards and be considered small within their particular industry. In addition, they must operate for profit, be engaged in doing business in the United States, have reasonable equity to be able to invest (minimally 10%), and must have tried to use other financial resources, including personal assets, before applying for a loan. An SBA 7A loan can be used to purchase new land, repair existing capital assets, purchase or expand an existing business, refinance existing debt, provide working capital and purchase machinery, furniture, fixtures, supplies or materials. A Bank will make the loan with this program, while the SBA guarantees 75% of the loan amount, providing the Bank a guaranty that a large portion of the principal will be repaid if the loan goes into default.

Benefits of the SBA 7A Program

  • Flexible structure
  • Up to 90% financing
  • Lower down payment compared to other financing options
  • Lower monthly payments
  • Offer variable and fixed-rates
  • Loan terms of 5 to 25 years:
    • 5 to 7 year term for working capital
    • Up to 10 years for business acquisition or equipment financing
    • Up to 25 years for real estate
  • Soft costs such as goodwill, franchise fees and closing costs eligible
  • The SBA will loan on the “value” of the business, even if the collateral does not add up to 100% of the loan amount, and in some cases will fund deals with no hard collateral at all.
  • Due to the loan being largely guaranteed, the Bank will take on an asset type they might not normally want to do. Some examples of these high risker businesses include hotels, restaurants and gas stations.
  • Specialized programs available for exporting; underserved communities; military and working capital needs

The SBA 504 loan program is an economic development loan program that offers small businesses another avenue for business financing, while promoting business growth and job creation. This program is made available through Certified Development Companies (CDCs), who work with the SBA and participating lenders to provide financing to small businesses. There are over 270 CDC offices nationwide, each having a defined area of operations covering a specific geographic area. Through this program, a business must typically create or retain one job for every $65,000 in funds guaranteed by the SBA. Eligible businesses for the SBA 504 program must also meet size standards and operate for profit. A business qualifies if it has a tangible net worth not more than $15 million and an average net income of $5 million or less after federal income taxes for the proceeding two years prior to application. SBA 504 loans are used for purchasing real estate, renovations / improvements to existing real estate, and equipment financing. A Bank will lend 50% of the total project cost and be in 1st position on the mortgage; the CDC will lend 40% of the total project cost and be in 2nd position on the mortgage; and the Borrower will be responsible for supporting the remaining 10% of project costs. The Bank will fully fund both portions of the loan at the time of closing until the CDC raises the funds through a bond sale to fund its portion, which can take anywhere from 30 days to 6 months after closing.

Benefits of the SBA 504 Program

  • Flexible structure
  • 90% financing
  • Lower down payment compared to other financing options
  • Lower monthly payments
  • Competitive fixed rate for 20 years on the SBA portion of the loan
  • Loan terms of 10 or 20 years available
    • 10 years for fixed assets / equipment
    • 20 years for real estate
  • Bank must provide a 10 year term (rather than typical 5 year balloon), with at least a 20 year amortization.
  • Bank may take on loans to higher risk or newer businesses due to their low LTV

What can you expect if you decide to explore an SBA loan to meet your small business needs?

  • All SBA loans require personal guarantees of the owners with 20% or more ownership interest in the business.
  • More documentation is involved with an SBA loan than with a traditional lender, as they are backed by the US government.
  • Anticipate the process to take a bit longer than a traditional loan, with typical approval to close times of anywhere from 45 to 90 days.
  • An SBA loan application has to first be approved and underwritten by the financial institution or small business lender prior to being sent to the SBA for underwriting and approval. If both organizations approve the loan, the financial institution will fund and service the loan.  In the case of SBA 7A loans, some Banks are approved underwriters, so once the Bank approves the loan it is automatically approved with the SBA.
  • SBA Fees – can be rolled into the overall loan
    • 7A – 3% guaranty fee based on the guaranteed portion of the loan (typically 75% of the loan amount)
    • 504 – 3% fee on the SBA portion, called the debenture

Is an SBA loan the right move for your business? For many businesses the benefits outweigh the costs. The SBA’s mission is to help start, build and grow businesses. Be sure to do your research, read the paperwork and know what you are getting into. SBA loans can be a great means for new entrepreneurs to secure needed capital; or for businesses without sufficient collateral to obtain the loan they need; and the longer terms and amortizations are very beneficial in helping businesses to improve their overall cash flow, allowing the business to keep their cash for working capital to grow their business.