Financial Wisdom

Small Business Administration Loans

Since 1953, the Small Business Administration (part of the Department of Commerce) has helped entrepreneurs get capital to start and expand their businesses. The SBA doesn't make grants to businesses, but rather provides loan guarantees to encourage participating banks to make loans to small businesses.

The SBA can be an attractive source for capital. However, as with many government programs, the process is not easy. There are numerous requirements for applying for a SBA loan, and if you get one there are some additional reporting requirements. If you are considering applying for a SBA loan, be sure to plan for at least 12 to 18 months for the process. Proper documentation and properly completed applications can shorten the process somewhat. Working with a bank or other lender that is familiar with the SBA process can also make the process easier.

The most common type of SBA program - 7(a) Guaranteed Loans
The most common form of SBA loan is a 7(a) guaranteed loan, with the loan made by a private lender (often a bank) and the SBA providing a guarantee on 75% of the amount of the loan. There are some maximize business size restrictions on these loans. For example, a retail or service company could have at least $6 million in sales (and perhaps up to $29 million) and still be eligible. A wholesaler can have up to 100 employees and still qualify.

The maximum the SBA will guarantee is $1,500,000 and therefore the maximum amount of the loan is $2 million. The interest rate on SBA 7(a) loans is tied to the prime rate. For loans with a term of 7 years or more the rate can be up to 2.75% above prime. For loans shorter than 7 years, the rate can be up to 2.25% above prime.
While there are some restrictions on the use of loan proceeds, such as floor plan financing, payments to owners, paying delinquent withholding taxes or other "imprudent" uses, generally proceeds can be used in the normal course of business.

Allowable uses of loan proceeds:

  • Purchase real estate to house the business
  • Construction, renovation or leasehold improvements
  • Acquisition of furniture, fixtures and equipment
  • Purchase of inventory
  • Working capital

Applying for a SBA loan requires completing various documents and may require collateral or personal guarantees. Lenders may also charge some origination fees.

Summary
SBA loans can be a useful source of needed capital for many small businesses. However, as with many government programs, there are additional paperwork (often bureaucratic) issues to deal with as part of the process. Interest rates are a couple percentage points over prime and repayment terms can be negotiated.
If you are considering a SBA loan, be prepared to spend some time and effort. Being well organized, having patience and working with an experienced SBA lender can make the process less burdensome.