Types of SBA Loans:

There are two primary types of SBA loans, which correspond to sections of the Small Business Administration Act that created the loan programs:  7(a) and 504.

7(a)

The 7(a) loan program is a direct loan from a private lender, that is partially GUARANTEED by the Federal Government (sort of like Uncle Sam co-signing for you).  It can be used for any eligible business purpose:  land & building, equipment, and working capital. But because an SBA 7(a) loan is a loan from a private lender, an applicant must not only meet the SBA’s criteria, but also the lender’s criteria.

 

One stumbling block that I often see is an applicant that does not meet the federal government’s eligibility requirements.  There are several categories, the most common areas I see trouble in are the following:

• Ineligible type of business:  There are several public policy businesses that are ineligible such as gentlemen’s clubs, gambling  establishments and lending companies.  The SBA is interested in financing businesses that are not, so to speak, discriminatory or too controversial, since it is after all our government that is guaranteeing the loan.  Another common ineligible request I see is for investment real estate.  An eligible business must occupy the majority of a building that an SBA guaranteed loan is used to finance.
• Ineligible use of funds:  A common request that is generally ineligible is refinancing debt that was not originally made on unreasonable terms.  The SBA guarantees loans for applicants for when credit is not available elsewhere.

Others include size of the business, US citizen or eligible resident alien and financial condition.

SBA will approve start up businesses based on projections, however, the direct lender must also be convinced enough to put their unguaranteed capital at risk.  Generally this is done by offering additional collateral to back the loan.

 

504

The 504 loan program is actually 2 loans:  one from a private lender, and the another from a non-profit organization called a “Certified Development Company” (CDC).  This loan combination can be used for the purchase of plant (land and building) and/or equipment that has a useful life of at least 10 years.  The 504 loan comes in 2 flavors:  20 year (land and building-related, including construction) and 10 year (real estate or equipment).

The neat thing about this program is it provides up to 90% financing for plant and equipment (spiffy, eh?).   A private lender provides a 1st lien loan for 50% and the CDC provides a 2nd lien loan for 30%-40% depending on eligibility.

 

The SBA eligibility requirements are similar to the 7(a), but also have an economic development component (primarily retained or created jobs).

The interest rate on the 504 loan is tied to market rates by institutional investors like investment and insurance companies that supplement their investments with government-backed loans.  As a result, the 504 loan is a great long term fixed rate financing loan for fixed assets.

One drawback is a prepayment premium charged on early repayment…so it’s not great loan option if you plan to flip the property in a couple of years.

 

Veterans, Women, Minorities?

No special treatment, you still have to meet the eligibility requirements for an SBA 7(a) loan.  If your business is owned 51% or more by one of these categories, you are eligible for up to $2 million in SBA 504 financing vs the traditional cap of $1.5 million.

Hopefully this de-mystified the two major types of SBA loans.  Corporate Funding is on standby to assist you in creating the right financing package for your business.

 

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