Mention SBA (Small Business Administration) loans to small business owners and here’s what typically jumps out of their mouths: “Too much red tape.” “Takes too long.” “The financing of last resort.”
These and other myths have persisted for years despite the reality that SBA loans are a viable, accessible option alongside conventional financing that entrepreneurs can leverage to grow their businesses. In today’s “credit crunch” environment, the loans’ value for banks and small businesses is amplified.
First, some quick definitions. The SBA has two mainstay programs – 504 and 7a. Odd names, but that’s another story. The 504 loan is used to purchase commercial real estate and/or large equipment. The 7(a) loan can be used for general business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building (new construction), leasehold improvements and debt refinancing.
The Benefits of SBA Loans
- SBA financing should be one of the first options small businesses consider. Why? Because they require smaller down payments than conventional loans, have lower rates, longer terms and broader credit standards than conventional financing.
- Most banks can provide a commitment on an SBA loan within a week of receiving a full package of financial information from a small business owner. CDCs (Certified Development Companies; authorized by the SBA) can approve SBA-504 loans (for commercial real estate purchases) within 48 hours.
- What many people would consider a larger business can still qualify for an SBA loan. For example, a business with 1,000 employees and annual sales of $25 million in some cases can qualify for a SBA-7a loan (intended for general business purposes). A business with a net worth of up to $8.5 million or average annual net profit as high as $3 million can still get a SBA-504 loan to buy their own building or purchase large equipment. *Update! SBA has issued new regulations to include even larger businesses as eligible. The new size standards are a tangible net worth no greater than $15 million, and average net profit after taxes below $5 million in the last two operating years.
- SBA loans are not direct government loans. 504 and 7a loans are acquired through a bank and/or a CDC. As business owners, you will interact with private-sector professionals rather than bureaucrats; SBA understands the value of partnership. The role of the U.S. government via the SBA is to reimburse the lender up to a prescribed percentage should the small business be unable to repay the loan – known as a loan guarantee – which helps the bank get comfortable making the loan if debt-service coverage is near or below its conventional lending standards. The small business borrowing the money remains obligated for the full amount due – just as it would with any loan – but the bank gets the added power of the SBA backing. That’s how credit is provided that otherwise would not be made available.