Looking for a crash course in SBA lending? Look no further! First Bank Financial Centre’s Deputy Director SBA SOP, Jake Scheider, breaks down the ins and outs of SBA lending to help you understand whether SBA funding is a viable option for you and your small business.
1. What is the SBA?
The Small Business Administration (SBA), established in 1953, is an independent agency of the federal government that was created to aid, counsel, assist and protect the interests of small businesses. The SBA lending program makes it easier for banks and other financial institutions to lend money to small businesses and the money lent through the SBA program is partially guaranteed by the federal government.
2. What are the benefits of an SBA loan vs. general commercial financing?
SBA loans offer borrowers flexibility, longer terms and potentially a lower down payment than what is required with conventional financing. Usually, for a borrower to qualify for a conventional loan, they have to provide the lender adequate collateral to fully secure their loan. Many small businesses do not have this collateral to provide. Borrowers are required to pledge any collateral available to secure an SBA loan but if the collateral is not available, this fact alone will not cause SBA to decline an otherwise qualified loan.
Additionally, borrowers are generally required to supply a 20% down payment on conventional loans. Most borrowers and owners do not have a 20% cash down payment to provide to obtain conventional financing. While the SBA does have certain equity injection requirements (surrounding start up businesses and changes of ownership), there is no specific amount of injection that is required to obtain an SBA loan.
The SBA also gives borrowers additional security by providing long-term loans. An SBA loan for equipment allows for a 10-year term while an SBA loan for real estate allows for a 25-year term. Conventional loans generally are not approved for longer than 3 to 5 years. This means that every 3 to 5 years, a borrower has to go through the stresses of a re-approval and the potential of a lender calling their entire loan amount due in full.
3. What types of products does SBA lending offer? What are the major differences?
There are a variety of different SBA lending products that give borrowers access to capital. Borrowers are required to pay a fee to obtain an SBA loan. These fees range anywhere between 2% to 3.75% of the guaranteed portion of the loan. There is no SBA fee on loans less than $125,000. In addition, SBA provides veterans a discount on the required fee. The SBA program operates at zero subsidy to the tax payer.
a. SBA 7(a) Loans
The most common type of SBA loan. A borrower can obtain an SBA 7(a) loan up to $5 million. These loans can be used by borrowers to start or acquire a business, expand or continue operating an existing business. Specifically, funds can be used for working capital, to refinance existing debt, to acquire an existing business or to purchase any of the following: furniture, fixtures, equipment or land and building (including the construction or renovation of buildings). Depending on the loan size, banks receive either a 75% or 85% guaranty.
b. SBA Express
A streamlined lending product that allows borrowers access to capital up to $350,000. The potential uses of funds are the same as with a standard 7(a) loan, but this program also gives the borrower the ability to access a revolving line of credit. The maximum loan guaranty to the bank for this product is 50%.
c. SBA CAPLine
SBA lines of credit meant to help small businesses meet short-term working capital needs. These lines of credit can be obtained for up to $5 million and are typically disbursed using a borrowing base certificate. Like an SBA 7(a) loan, banks receive either a 75% or 85% guaranty depending on the amount of the loan.
d. SBA 504
Issued through a partnership between Certified Development Companies (non-profit corporations certified and regulated by the SBA to package, close and service 504 loans) and third-party lenders, this program is generally designed to provide financing for the purchase of fixed assets. The total loan provided is 50% by the third-party lender, 40% by the Certified Development Company and 10% as an equity injection provided by the borrower. The amount of required injection by the borrower can range from 10% to 20%. The portion of the loan provided by the Certified Development Company provides a fixed interest rate over a 10 or 20-year term, depending on the type of fixed assets being financed.
e. Export Loans
The SBA also has a variety of programs designed to help small businesses expand their export activities, engage in international transactions and enter foreign markets. These loans generally have a 90% guaranty.
4. What is an SBA Preferred Lender and why is it important to work with one?
SBA Preferred Lenders are authorized by the SBA to make guaranteed loans with limited involvement by the SBA. The use of a preferred lender will provide the borrower much quicker access to the capital they need. Preferred Lenders are able to make underwriting and closing decisions within their institution without having to obtain separate SBA approval. SBA loans processed through a non-preferred lender have to be sent to the SBA processing center in California where the loan is underwritten and approved separately by the SBA.
5. What advice would you give a potential business client?
If a potential customer is interested in applying for an SBA loan, they should search for a lender who has the knowledge and expertise in approving, closing and servicing SBA loans. The SBA loan program is governed by a 400-page standard operating procedure with different rules and different requirements for each separate SBA loan product. There are many lenders that dabble in the SBA, but borrowers should look for an SBA lender with in-depth knowledge of the SBA program. This will allow borrowers quicker, more efficient, less stressful access to the capital they need.
As a final note, the SBA fully supports veteran-owned businesses and offers no fee and discounted fees on most of their loan programs to veterans.
Think you might want to look into SBA financing for your small business? Contact FBFC today to get started.