Different Types Of SBA Loan

January 5, 2014

SBA or Small Business Association was designed back in 1953 by the US congress for the development of the small businesses of the nation. SBA is based on some of their small groups for example SBDC (Small Business Development Center), Pro-Net, Disaster Assistance, SCORE and even more importantly, the guaranteed loan program. The guaranteed loan program provides the small businesses funds with low interest, long term and high leverage. This credit allows small businesses to grow and expand in which it aids economy and offers jobs. The thing that many don’t know is that the administration doesn’t lend and it’s financial institutions and lenders that fund the loans.  SBA simply guarantees substantial part of the loan and that’s why financing companies are able to leverage up to 90% of the collateral.

If you have a for profit small business, you are automatically permitted to obtain an SBA loan. You will find exceptional cases where SBA refuses credit such as criminals on paroles, nonprofit organizations, check cashing, passive or speculative activities etc. There is another item you ought to remember. This type of financing is designed for small enterprise and they are qualified if the tangible net worth is less than $15M and average net income is $5M or less. 

You will find different sorts of SBA loans. Here are the details:

The 7(A) Loan

The 7(A) loan is one of the most widely used loans guaranteed by the SBA. It can be easily used to buy owner user real estate properties, equipments, business, or used for working capital and growth. You need to keep an asset or collateral as a security for 100% of the credit you are getting and maximum amount borrowed is $5M under this program. The obvious good thing about this loan is the fact that you are able to borrow up to 90% of the value of the collateral so you only need 10% equity injection into your real estate or equipment purchase.  It’s also easier for borrower because government guarantees 75% of the total loan amount so it’s very secure investments for the lender.  The other reason why a lot of banks and lending institutions push such a product is the profitability of it.  These types of loans can be sold for 9% or more premiums in secondary markets. For example, if the bank sells $1M loan, they’ll get their $1M back plus $90K in fees.  And of course the capital requirement for such a financing is only 10% of the unguaranteed portion.  So for the very same $1M loan, the unguaranteed portion is $250K so the banks’ mandatory capital requirement is only $25K plus, they made $90K in sale of the loan. 

Express loan:

If you want to require a small loan for your start up business, you have the choice to choose SBA express loan. As the name suggests, the borrowed funds is offered to you in a really quick precision of time. You will find the cash in your hand within few weeks. One of the biggest features of it is the low and negotiable interest rate. You will get:

• Interest rate of 4.25% for loans less than $25,000 with less than 7 years development
• Interest rate of 4.75% for loans less than $25,000 with more than 7years development
• Interest rate of 3.25% for loans from $25,001-$50,000 with less than 7 years development
• Interest rate of 2.25% for loans more than $50,000 with less than 7 years development.
• Interest rate of 2.75% for loans more than $50,000 with more than 7 years development
• Interest rate of 3.75% for loans from $25,001-$50,000 with more than 7 years development

This type of SBA loan is more popular among non-profit organizations and small mom and pop businesses. Microloan is a very small amount of loan adequate to get the business rolling. This type of loan is mainly used to buy office supplies, furniture etc.

SBA 504 and CDC loans:

Except for the kinds mentioned previously there’s another one referred to as SBA 504 loans. This kind of loan is primarily used by established small businesses to acquire real estate assets and often with mixture of fixed assets like equipments and fixtures.  This form of financing is for larger real estate transaction where loan amount is much more than $1M.  Borrowers can continue to leverage up to 90% for multi-use properties such as office buildings, industrial or retail properties and 85% for special purpose real estate like self storage, gasoline stations, or hotels.  Conventional lenders provide fifty to sixty percents of the purchase price or appraised value as first trust deed and Community Development Centers (CDC) fund the second trust deed up to 40% so borrowers must come up with only 10% down payment.  The maximum borrowed amount for CDC portion is $5M which means you can borrow total amount of $11M under this program. 

Each one of these programs and products are solely made for the benefit small businesses to provide liquidity and improve economy and employment. Nevertheless, just because the loans are guaranteed, it doesn’t mean any one can get them.  All borrowers must demonstrate that they can repay the loan and their business profit is sufficient to service the debt.

For more information about SBA financing please Click Here.


Comments are closed.