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SBA Loans Programs For Small Businesses USA 2021

The US Small Business Administration or the SBA provides loans to small businesses, which fail to fulfill the eligibility criteria required to obtain loans from banks and other conventional sources. SBA loans aim at strengthening and improving the economy of the nation by supporting the growth of small businesses. There are various ways start-up business owners can benefit from these loans.

What is an SBA loan?

SBA loans are term loans from a bank or commercial lending institution of up to 10 years, with the Small Business Administration (SBA) guaranteeing as much as 80 percent of the loan principal.

Who are SBA loans for?

SBA loans are for established small businesses capable of repaying a loan from cash flow, but whose principals may be looking for a longer-term to reduce payments or may have inadequate corporate or personal assets to collateralize the loan.

How many loans are available?

Vast. The Small Business Administration guarantees some $12 billion per year in loans.

Best Use of Loans: Purchasing equipment, financing the purchase of a business, and in certain instances, working capital. The Small Business Administration guarantee can help borrowers overcome the problems of a weak loan application associated with inadequate collateral or limited operating history.

What are the fees or cost?

Comparatively inexpensive when looking at other loan sources. Maximum allowed interest rates range from highs of prime plus 6.5 percentage points to prime plus 2.75 percentage points, though lenders can and often do charge less. These rates may be higher or lower than rates on non-guaranteed loans. What’s more, banks making SBA loans cannot charge “commitment fees” for agreeing to make a loan, or prepayment fees on loans under 15 year (a prepayment penalty kicks in for longer loans), which means the effective rates for these loans maybe, in some instances, superior to those for conventional loans.

Ease of Acquisition: Challenging. Although The Small Business Administration has created streamlined approaches to loan applications, conventional SBA guarantee procedures and protocols pose significant documentation and administrative challenge for most borrowers.

Range of Funds Typically Available: The Small Business Administration guarantees up to $1 million of loan principal.

Steps in Getting an SBA Loan

While most banks, as well as select commercial finance companies, offer SBA loans, there are two specialized categories worth knowing about. These are Certified Lenders and Preferred Lenders, both of which have entered into contractual relationships with the SBA and officially participate in the Certified Lender/Preferred Lender programs (CLP/PLP).

These lender programs were designed to provide better responses to borrowers; they accomplish this goal by placing additional responsibilities on the lenders for analysis, structuring, approval, servicing, and liquidation of loans, within The Small Business Administration’s guidelines. About 850 lenders qualify for the SBA’s Certified Lender Program, having met certain criteria, the most important of which, from the borrower’s perspective, is extensive experience in SBA loan-guarantee processing. Certified lenders account for about 4 percent of all SBA business-loan guarantees. Since the certified bank does much of the SBA’s work, the agency offers turnaround times of three business days for processing the application.

Approximately 450 lenders meet preferred lender standards. This group processes approximately 21 percent of loans. Preferred lenders have full lending authority and as a result, can offer a one-day turnaround on completed loan applications.

If you are seeking a loan, your best bet is to work with a certified or preferred lender. The SBA-guarantee process is tricky at best, and you want a lender who has been through it more than once.

These lender programs were designed to provide better responses to borrowers; they accomplish this goal by placing additional responsibilities on the lenders for analysis, structuring, approval, servicing, and liquidation of loans, within The Small Business Administration’s guidelines. About 850 lenders qualify for the SBA’s Certified Lender Program, having met certain criteria, the most important of which, from the borrower’s perspective, is extensive experience in SBA loan-guarantee processing. Certified lenders account for about 4 percent of all SBA business-loan guarantees. Since the certified bank does much of the SBA’s work, the agency offers turnaround times of three business days for processing the application.

Various SBA Loans Programs and Their Advantages

Let us discuss some of the advantages of SBA small business loans:

  • You can conveniently obtain these loans even if you are devoid of properties that can serve as collateral. SBA provides full assistance in such cases by being your guarantor.
  • Start-up business owners have little capital. They are more in need of loans at every step of setting up their business than the more established ones. Hence, SBA provides loans at extremely low-interest rates to make it easier for them to make debt payments while setting up their business.
  • These loans can be obtained fast and without any kind of hassles. You can get them as soon as you apply for them.

These loans cannot be obtained directly from SBA. They merely set up the rules and regulations that are followed by the various banks and private-sector lenders that provide these under the authorization of the SBA. SBA provides various loan programs that are designed to cater to different financial situations. Let us discuss the various loan programs available for business owners:

SBA 504: These can be used for purposes such as constructions, renovations, purchasing real estate properties and equipment. They cannot be used for refinancing existing credits. The various advantages of these include:

  • More relaxed and flexible lending requirements and eligibility criteria than conventional loans.
  • Longer maturity periods than loans obtained from conventional sources.
  • Lower down payment requirements on fixed assets.
  • The amount starts from a minimum of $350,000 with no maximum limit.

SBA 7(a): These SBA loans are obtained for purchasing a new business or expanding an already existing one, purchasing machineries and refinancing existing debts. The advantages of these are almost same as SBA 504 loans such as:

  • Longer maturity periods than traditional loans.
  • Reduced down payment requirements on fixed assets.
  • More convenient and relaxed eligibility criteria than conventional loans.
  • The loan amount ranges from $350,000 to 3.5 million.

SBA Express: These can be used for purchasing inventory or vehicles, machineries etc. The various advantages of these credits include:

  • Longer maturity period than most conventional loans.
  • Easier and more relaxed lending requirements than conventional credits.
  • Loan amount ranges from $25,000 to $350,000.

There are various banks and private sector lenders providing SBA loans. It should however be kept in mind that all the banks do not offer the same SBA loan programs. Even the lending requirements may sometimes differ based on individual bank policies. Hence it is important for you to choose the right program and an appropriate provider based on your financial situation and requirements.

SBA small business’ are excellent options for start-up business owners, provided they opt for the right loan program and avail it from the right lending source.

7 SBA Loan Myths

Myth #1- All banks evaluate the risks of a SBA loan request with the same viewpoint.

Financial Fact- Although all banks are subject to the same SBA Guidelines, the rules are subject to different interpretations with respect to analyzing a particular loan request. Some banks may be willing to take greater risks. Some banks will take a more optimistic evaluation of the facts and your business’s future success. Therefore, choosing the best bank for your SBA loan needs can make the difference between loan approval and denial.

Myth #2- All banks offer the exact same types of financing for SBA loans.

Financial Fact- Loan pricing and structure can vary substantially at different banks. Interest rates on SBA loans are based on the prime rate plus a margin. Some banks are more competitive in price to be leaders in SBA lending. Some banks will carve out a provision for accounts receivable and inventory financing from their loan agreement to permit additional third-party commercial financing in addition to the SBA loan. For the same loan, some banks will require additional collateral guarantees, such as a lien on your house. Evaluating the adequacy of such additional collateral guarantees is also subject to interpretation.

Myth #3- It takes too long to get through the red tape of SBA loans.

Financial Fact- This may be true if the bank has to deal with the SBA bureaucracy. Many lenders have “delegated authority” to directly approve an SBA loan. They can provide a full written loan proposal within 48 hours, and some provide a loan commitment within a week of receiving a full loan package. Closing the loan depends on the specific requirements of each transaction, but takes no longer than closing a conventional commercial loan. If the loan requires an appraisal, this may add several weeks to the process.

Myth # 4- SBA loans are only for start-ups or small companies, and not for “big” companies.

Financial Fact- The SBA defines a qualifying small business as “one that is independently owned and operated and which is not dominant in its’ field of operation.” The SBA does not discriminate between start-ups or established businesses, and company size requirements are not the same across the board. The actual standard used in determining qualification is calculated by the number of employees or average annual receipts and varies by industry. For example, in the manufacturing and mining industries, a business can have no more than 500 employees to qualify. Average receipts in most retail and service industries can total no more than $5.5 million. The SBA size regulations are located at sba.gov. Most lenders can tell you immediately if your business qualifies regarding income and the number of employees.

Myth #5- SBA loans require a lot of collateral.

Financial Fact- SBA lenders do consider collateral when reviewing a loan application, but they also look at several other factors. Your character, your creditworthiness with respect to your history of paying your debts, your management capabilities, and your equity contribution are just as important as having collateral. SBA lenders. Look at your business as a whole, and although they will not deny you a loan solely due to lack of collateral, it can be a contributing factor if there are other weak spots in your application. Ultimately, your ability to repay the loan from your business’s cash flow is the most important consideration.

Myth #6- SBA loans are loans from the Federal Government.

Financial Fact – SBA loans come from commercial lenders who participate with the SBA in SBA lending. The Small Business Administration is an agency of the executive branch of the Federal Government. It establishes guidelines that lenders must follow when giving SBA loans and the SBA backs each loan with a guarantee that eliminates some of the risks to the lender. The actual funds for each loan will come directly from the financial institution. The SBA loans are backed, up to the amount of the guarantee, by the SBA.

Myth # 7- SBA loans are a loan of last resort.

Financial Fact- Lenders that offer SBA financing should be one of the first places a start-up or small business owner goes when seeking a business loan (unless you have a friend or relative willing to invest in your business). The express purpose of the SBA is to help Americans start, build, and grow businesses in order to promote a healthy economy. SBA loans are structured with longer terms, lower down payments, and can have lower rates than conventional commercial loans so small business owners have increased cash flow. Going to a lender for an SBA loan is especially valuable for business owners seeking loans who may not have the collateral required with typical commercial loans. There is a reason the SBA is the largest single financial backer of U.S. businesses in the nation.

You need to assess your business’s current health and growth potential. Would it benefit your company if you refinanced old debt? Could you increase business with more equipment? Would a facelift bring in more customers? Would a combination of SBA financing with commercial financing for accounts receivable and inventory help you succeed?

It is critical to your business that you know not only when to seek financing, but how much you will need, and what is available. Many businesses suffer or even fail because their owners do not take out loans when they need to, or they fail because their owners do not borrow enough. Understanding your options will help you determine these things, which can in turn help your business flourish.

Are SBA Loans Limits Good for Small Businesses?

An SBA business loan is one of the most popular methods of funding a small business. Basically, this type of loan offers banks a guarantee on any small business loan, giving banks more reason to approve the loan.

There are two major SBA business loan programs available today. These are:

  • The 7(a) loan program – This is an organization’s most adaptable and popular initiative. It is designed to offer SBA commercial loans to small businesses, both start-up and existing.
  • The CDC/504 loan program – This program offers long-term and fixed-rate funding, which is aimed at obtaining fixed assets.

The loan programs have distinct maximum loan amounts. The 7(a) loans have a maximum limit of $2 million, while the CDC/504 loans range from $1.5 million to $4 million, depending on the type of business and other criteria.

As a means to assist small businesses during the recession, the current US administration proposed to increase the loan size cap for standard CDC/504 and 7(a) loans to $5 million. A similar proposal was submitted for CDC/504 manufacturer loans, to be increased to $5.5 million. These developments will allow entrepreneurs to take on larger ventures or projects. Congress is now considering the said proposal.

The SBA Loans Requirements

Aspiring entrepreneurs need to meet a number of requirements to be eligible for an SBA loan application. First off, you must have applied for a conventional business loan from a commercial institution, and have been turned down. You will not be eligible for SBA business loans if you are able and capable of acquiring investment funding from other sources. In addition, you are required to identify the specific program in which you want to receive an SBA business loan for because each program covers different requirements:

  • For loan 7(a), you must have the ability to pay back the loan from your business cash flow, with a maximum duration of 25 years. Also, your business should be for-profit and should meet the requirements set by SBA for small businesses.
  • For the loan CDC/504, it is only accessible if your venture is operational for-profits, has a net worth lower than $7,000,000, does not exceed the size required by the SBA, and has a net income that does not exceed $2,500,000. This type of SBA loan can only be utilized for projects with fixed assets.

For faster assessment of your eligibility for SBA loans, you need to prepare the following information when you meet with a lender:

  • business profile that includes the type of business, length of operation, and employee statistics.
  • Loan request that shows the purpose, type of loan, and the amount.
  • Collateral description
  • Business financial statements for the past 3 years, including the latest interim statements.
  • Personal financial statements of other officers, partners, stockholders, and owners.

The SBA Loan Rates

The SBA loan rates are among the major concerns of most entrepreneurs when applying for an SBA business loan. This is, indeed, a complex issue that needs thorough discussion between you and the lender.

In 7(a) type SBA loans, the interest rates can be negotiated, but these should not exceed the level required by SBA. On the other hand, fixed-rate loans have the following interest rates:

Loan AmountLess Than Seven YearsMore Than Seven Years
Up To $25,000Base rate + 4.25%Base rate + 4.75%
$25,000 – $50,000Base rate + 3.25%Base rate + 3.75%
$50,000 Or MoreBase rate + 2.25%Base rate + 2.75%
Source: Merchant Maverick
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