Understanding and Accessing SBA Loan Programs
Starting and successfully running a small business is filled with challenges. One of the most critical challenges that small businesses face is access to capital. The ability of small business owners to find both permanent and working capital can spell the difference between failure and success. The U.S. Small Business Administration (SBA) is a federal agency which offers credit enhancements and loan guarantees to lenders – allowing them to make loans to creditworthy borrowers on terms and conditions not available through conventional means. These SBA Loan Programs are an extremely valuable tool for small business owners seeking capital for startup and growth needs.
Expert help: Fidelity Bank of Florida is a very active SBA lender who serves the I-4 Corridor. The bank participates in a variety of SBA Loan Programs.
“SBA loan programs are an extremely valuable tool for small business owners seeking capital for startup and growth needs.”
7(A) LOAN PROGRAM
This is the best known, most widely used SBA Loan Program. The 7(a) Loan Program is a commercial term loan or line of credit made by a participating lender directly to a creditworthy borrower. This credit extension carries a percentage “full faith and credit” guaranty from the U.S. government. Proceeds of the 7(a) Loan Program can be used for many different purposes such as commercial owner occupied real estate acquisition, fixed asset and business acquisition, permanent working capital, as well as debt refinancing. Maximum loan amount under this SBA Program is $5,000,000 per borrower.
504 LOAN PROGRAM
This program is available exclusively for fixed asset financing. The most widely used application is acquisition of owner occupied commercial real estate. A great example of this is the financing of a medical clinic building which is owned by the doctors who occupy the facility. Machinery and equipment may also be financed under the 504 Loan Program. The financing structure involved is hybrid in nature. The primary lender provides senior security financing for 50 percent of the project funding, coupled with junior financing up to 40 percent provided by the SBA through local Certified Development Companies. A minimal equity injection is required by the borrower. The junior financing piece is provided at a fixed rate for 20 years.
CONVENIENT FOR THE UNCONVENTIONAL
Generally speaking, qualified SBA borrowers are non-traditional in nature. They have some inherent component to their financing requests which lenders cannot handle in a conventional manner. This may be a shortage of collateral, lack of operating history, absence of an adequate equity position, or the need for an extended maturity for the loan request. This extended maturity feature is a key advantage of SBA Loan Programs.
With an SBA guaranty, lenders are able to significantly extend loan maturities. Examples of this would be up to 10 years for machinery and equipment, working capital, and business acquisition financing. With an SBA guaranty, lenders may make a 25-year term loan for acquisition or construction of commercial owner occupied real estate. This extended term allows the borrower to maximize cash flow and effectively manage cash flow, which is the lifeblood of any successful small business.
In summary, effective use of SBA Loan Programs is a great tool for lenders and creditworthy borrowers. Great flexibility is afforded users of the programs, and the results of well-structured financing can provide a great benefit to borrowers as they seek start-up and growth financing. Of course, there are always some objections from borrowers when lenders suggest the use of SBA guaranteed loans. Payment of fees, additional documentation, transaction timing issues, and working with the government are but a few. Selection of a well-qualified, experienced SBA lender is critical to a successful transaction.