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SBA Loan Program Basic

Written by: Bob Macek

Article Overview: All SBA loan programs lend to small businesses unable to secure financing on reasonable terms through normal lending channels. The loan programs are operated through private-sector lenders that provide loans which are, in turn, guaranteed by the SBA. Keep in mind that the SBA has no funds for direct lending or grants. Most private lenders (banks, credit unions, etc.) are familiar with SBA loan programs so you should contact your local lender for further information and assistance in the SBA loan application process.

SBA Loan Program Basic

SBA 7(a) Loan Guaranty Program:
The most active SBA loan program is called the 7(a) Loan Guarantee. Again, please note that the 7(a) program is not a direct loan from the SBA! It is a loan from an SBA-approved bank or non-bank lender. In order to entice lenders to make loans they'd otherwise decline, the SBA provides the lender with a guarantee of up to 95% of the loan.

The 7(a) program offers loans of up to $2,000,000. (The maximum dollar amount the SBA can guaranty is generally $1 million.)

7(a) loans generally offer up to 25 year repayment for real estate and equipment and up to 7 years for working capital.

All owners of 20 percent or more are required to personally guarantee SBA loans and be prepared to pledge your home as collateral.

Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate.

Interest rates may be fixed or variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25 percent if the maturity is less than 7 years, and Prime Plus 2.75 percent if the maturity is 7 years or more.

For loans between $25,000 and $50.000, maximum rates must not exceed Prime Plus 3.25 percent if the maturity is less than 7 years, and Prime Plus 3.75 percent if the maturity is 7 years or more.

For loans of $25,000 or less, the maximum interest rate must not exceed Prime Plus 4.25 percent if the maturity is less than 7 years, and Prime Plus 4.75 percent, if the maturity is 7 years or more

The lender will generally want you to contribute at a portion (usually 20-25%) of the total cost of the project.

In determining how much you need to borrow, don't forget to budget a cushion for the odds and ends you don't anticipate and for any disruption in cash flow during the period of construction.

As for how to choose a bank, call your local SBA office for a list of their Preferred and Certified lenders. While Preferred lenders are the most active lenders and thus receive the quickest responses from the SBA, Certified lender will sometimes try a little harder because their loans receive a higher guarantee from the SBA. Many lenders hold both Preferred and Certified status.

Don't assume that a decline by one SBA lender means you'll be declined by all of them. Each lender has their own approval criteria so unless the loan has been declined by the SBA themselves, don't be afraid to try more than one lender. Sometimes you have to kiss a lot of frogs before you find your handsome prince. On caveat here, be sure to tell each lender if and why you're trying others. SBA lenders are a tight bunch. They will find out if you're shopping, or if you've been declined by another lender, and it will look bad for you if you didn't disclose it.

If you've never applied for an SBA loan before, the process may be a bit daunting but it's really no more cumbersome than any small business loan application. If you decide you want help in the preparation of your package, ask for a recommendation from one of the bankers you plan to use. You might also find free help from your local Small Business Development Center (SBDC) but only use them if they have a successful track record in packaging SBA loans.
More SBA 7(a) loan information from the SBA

SBA LowDoc Loans:
If your loan request is for less than $150,000, you may qualify for an SBA LowDoc loan which has a much simpler application and approval process.The SBA usually makes a decision on LowDoc loans within 36 hours of receiving a completed application.
Rates and terms are similar to the SBA 7(a) loans.
More SBA LowDoc Loan information from the SBA

SBA Express Loans:
SBA further streamlines the borrowing process. SBAExpress loans allow lenders to use their own forms and processes to approve loans guaranteed by the SBA. Loans of up to $250,000 can be made with a guaranteed 36 hour maximum turnaround. Lenders can process these applications online. The SBA has also announced an expansion to the SBAExpress loan lenders network that will make the loans available to even more businesses
More SBA Express Loan information from the SBA

SBA Microloan Program:
This new program offers loans of up to $35,000 to qualified start-up, newly established, or growing small business concerns. Loans are arranged through nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers. The entire Microloan process is handled on the local level, but you must go to one of the local intermediaries.
More SBA Microloan information from the SBA

For more information on all of the SBA's loan programs, a directory of their regional offices, and other useful links, GoTo: SBA On Line..

A final note:
If your considering buying an existing business it's likely the seller will require a smaller down payment than the 20% required by the SBA. In addition, the seller will finance the balance of the sale price with more attractive terms. Remember, however, to consider all possibilities.

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Article Tags: bank lender, cash flow, collateral interest, direct loan, disruption, fixed rate loans, loan guarantee, loan guaranty program, maturity, maximum dollar, maximum interest rate, maximum rates, maximums, preferred lenders, prime rate, rate interest, sba loan program, sba loans, sba office, working capital



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