Without a doubt, Small Business Administration 7(a) loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low interest rates. Getting one can help you grow your business without taking on possibly crippling debt.
SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing.
SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners. The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.
What is an SBA Guarantee?
Lenders provide the funds that make up an SBA loan, but the agency guarantees a portion of the amount, up to a $3.75 million guarantee. That means if you default on the loan, the SBA pays out the guaranteed amount. This guarantee lets lenders offer longer terms for repayment than they otherwise could, which means your monthly payments will be lower.
Do SBA Loans Require a personal Guarantee?
The SBA requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
SBA 7(A) Program
Banks, savings and loans, credit unions, and other specialized lenders participate with SBA on a deferred basis to provide small business loans that are structured under 7(a) guidelines. When a lending partner applies to SBA for a guaranty on a proposed loan, it must certify that it would only make the loan if SBA guarantees it. SBA then decides whether to guarantee the loan based on the information provided in the loan application.
When a loan is guaranteed by SBA, certain conditions are imposed on the lending institution. Some of these conditions are related to how the lender must close and administer the account; others are imposed on the borrower, and pertain to the business or its owner(s). The borrower must agree to these requirements as a condition for obtaining the loan.
SBA offers its lending partners a variety of methods for applying for a guaranty on proposed loans. The differences are related to the levels of authority and responsibility the lender and SBA have in making decisions associated with processing, closing, and administering each loan. Lenders are given authority to take on more of these responsibilities based on their experience and performance with SBA. The better a lender has conducted its analysis and performed administrative functions in the past, the more likely SBA will not have to re-analyze or check these factors in the future.
SBA 504 Debt Refinancing Program
A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation. CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
Typically the role of a CDC includes:
• Market the 504 program; package and process 504 loan applications; close and service 504 loans in its Area of Operation; portfolio must be diversified by business sector.
• Provide small businesses with financial and technical assistance, or help small businesses obtain assistance from other sources, including preparing, closing, and servicing loans under contract with lenders in SBA's 7(a) Loan Program.
• Loan amounts to the borrower equal to the value of all or part of the borrower's contribution to a project in the form of cash or land, including site improvements.
Typically, a 504 project includes:
• A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
• A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost;
• A contribution from the borrower of at least 10 percent equity.
Call Bill Rapp, the Mortgage Viking, today to discuss your options 281-547-6706.
