SBA is an acronym for the Small Business Administration which is a government agency that guarantees small business loans. A common misconception is that the SBA actually makes loans to businesses directly, when really it is independent bank and non-bank lenders as well as CDCs (Certified Development Companies) that provide the financing. In the event a business owner defaults on a loan made by an SBA lender, the SBA will reimburse the lender up to 90% of the original loan amount.
What can SBA Financing be Used For?
SBA financing can be used for a variety of purposes as long as the loan proceeds are for business use, and the business meets the eligibility guidelines determined by the SBA. Some common uses of SBA loan proceeds include purchasing real estate, refinancing real estate, consolidating debt, working capital, purchasing a business, starting a business, purchasing equipment, purchasing inventory, expansion, advertising, hiring, marketing, leasehold improvements, construction and other business uses.
Although the SBA dictates which lenders can provide SBA financing and the parameters under which financing must be delivered, it is up to the participating lender what SBA programs it wants to offer. For example, the SBA guarantees business start-up and construction loans, but most SBA lenders do not provide them (our recommended SBA lender Fountainhead, provides startup and construction loans).
Who Can Qualify for SBA Financing
Most small businesses are eligible for SBA financing if they meet the below criteria:
- For-profit, non-publicly traded businesses are eligible
- Business net worth cannot be > $15 million
- Average net business income cannot be > $5 million
- US citizens or legal permanent residents are eligible
Industries not eligible for SBA financing are:
- Those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole
- Real estate investment firms or when the real property will be held for investment purposes
- Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade
- Dealers of rare coins and stamps
- Pyramid sales plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants
- Charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations and consumer and marketing cooperatives
Particular credit score requirements, collateral requirements, industry requirements, cash-flow requirements and much of the other criteria for SBA loan eligibility will be set by the participating lender itself. Most lenders prefer certain industries and borrowers with credit scores over 680 who have no recent derogatory issues such as a bankruptcy or foreclosure. South End Capital provides subprime SBA loans so borrowers that don’t meet most SBA lenders guidelines for eligibility, are often still able to access the benefits of the program.
All borrowers looking to obtain SBA financing must have been in business for at least one year, have filed their tax returns and not have delinquent payroll taxes, open judgments or past defaults on government debt.
The Primary Types of SBA Financing
There are multiple SBA financing programs available but the most common programs offered by participating SBA lenders are the 7(a) and the 504 program. There are many benefits to both of these programs that include:
- High loan-to-value (LTV) ratios
- Below market interest rates
- Myriad eligible collateral types
- Flexible underwriting
The SBA 504 program is used to purchase or refinance real estate occupied > 51% by the owner’s business. Funds can also be used for the renovation or ground-up construction of commercial real estate as well as the inclusion of heavy equipment. An SBA 504 loan (in most cases) will be funded 50% by the participating lender, up to 40% by a CDC, and in the case of a purchase the remaining 10%+ will be contributed by the borrower. Funds cannot be used for working capital, inventory, good will, business stock or intangibles. The range of loan sizes available under the SBA 504 program is quite wide, with most lenders offering loans from $200,000 up to $20 million or more. The SBA 504 program also has the benefit of long-term fixed interest rates out to 25 years (Fountainhead is the industry leader in SBA 504 financing and its team has funded over $23 billion of loans).
SBA 7(a) loans are also guaranteed by the Small Business Administration. The difference is that 7(a) loans do not require the involvement of a CDC, the participating lender funds the entire loan and in the event of default the SBA will reimburse it up to 90% of the loan amount. High-LTV financing is also available under the 7(a) program (obtain up to 200% LTV through South End Capital’s subprime SBA program) but eligible uses of loan proceeds are more varied. Funds borrowed under the 7(a) program can be used for purchase, refinance, renovation or ground-up construction of commercial real estate occupied > 51% by the owner’s business. Funds can also be used for non-real estate business needs such as working capital, equipment, inventory, partnership buyouts, debt consolidation, business or franchise purchases, leasehold improvements, expansions and even business startups. Loan sizes under the SBA 7(a) program usually range from $25,000 up to $5 million and do not always require that real estate or hard collateral be included. Rates can be fixed under the 7(a) program, but most lenders offer a quarterly adjustable rate of Prime + 1.75% to Prime + 3.75%.
Navigating the SBA Loan Process
Under the Clinton administration the paperwork involved in obtaining an SBA loan was significantly reduced, so much of the stigma about the SBA process being lengthy and prohibitive is left over from a different time. However, the loan process by comparison to alternative business lenders can be daunting. The SBA requires certain forms and copious amounts of paperwork be completed that is not required for a bank or alternative business loan. Depending on the SBA loan provider you are working with and its experience level, the process can take anywhere from 30 to 90 days or more. Using a seasoned SBA loan facilitator like Smartbiz, which has facilitated over $1 billion in SBA financing, is highly recommended and will save significant time and money.
If you are going to work with an SBA lender directly be sure to do your research, many lenders offer SBA loans but very few specialize in them and have the experience and staff necessary to make your SBA loan process an easy one. Fountainhead is a great example of a direct SBA lender you can count on, since the firm has funded over $23 billion in SBA loans and offers both SBA 504 and SBA 7(a) financing.
SBA financing is a great vehicle to obtain high-leverage and low interest rates to help build your business. Many small business owners are scared away from SBA financing due to misinformation, or stories about experiences of those who chose the wrong lender or intermediary. There isn’t a program more flexible than SBA financing to meet your business’s various capital needs, but it is imperative that you work with an experienced lender or intermediary to obtain your SBA loan. Another great thing about SBA financing is that you can get more than one SBA loan. You can choose to finance your business real estate purchase with an SBA loan, get a different SBA working capital loan and then even obtain another SBA loan to purchase equipment.
Interested in learning more about getting SBA financing? Contact our 2019 Best SBA Lender Fountainhead, our 2019 Best Business Working Capital Lender Smartbiz, or our 2019 Best Commercial Real Estate Lender South End Capital.