A. THERE ARE CURRENTLY THREE DIFFERENT SBA LOANS OFFERED TO SMALL BUSINESSES.
For many of our small business owner clients, a Small Business Administration (SBA) loan is a great alternative to funding through the usual lending channel of a bank or credit union. These loans are long-term in nature and offer a low rate which makes them attractive to many business owners particularly to those businesses who are just getting off the ground. Because of the term and rate, they are popular and the federal government knows this so they make the application process a tedious and difficult one for sure. The first thing that you need to figure out before you apply is to consider which SBA loan is right for your specific needs. Not all SBA loans were created equally and each will vary depending on your companies immediate and long-term goals.
B. The 7(a) Loan Program is the Most Popular.
The most popular SBA loan program is the 7(a) loan program. This program is far and away from the most popular of the three existing loan programs and offers a purchaser the flexibility of using the capital for purchasing equipment or real estate, acquiring an existing business, or refinancing existing debt. The credit limit is high with a cap of five million dollars. Before you run out to your local lender to complete a 7(a) application, you should be aware that a guarantee will be attached to your loan. This guarantee is a fee of about 3.5% and usually attaches to higher dollar loans between $700,000 and one million dollars. Over a million dollars will get you an additional 0.25% guarantee fee. With these loans, the interest rate will be either fixed or variable. Often, the interest rate on these loans ends up between 6 and 13%. As to the guarantee fees, those are paid over the life of the loan which makes it easier for some small business to manage.
C. The CDC/504 Loan Program.
This program is designed to cater to a small business that needs financing for major fixed access purchases such as the purchase of land or existing buildings, construction of new buildings, renovation of existing buildings, or long-term purchase of machinery or equipment. This loan has the same cap as the 7(a) loan of five million dollars. In order to qualify for this particular loan, however, the applicant must be in a position to show that it needs the funding by having a net worth of fewer than 15 million dollars and a net income of fewer than five million dollars. Put another way, the SBA wants to loan these funds to new businesses that are necessarily undercapitalized in order to help them get off the ground. The program is specifically designed for that purpose. Here, as in the case of the 7(a) loan, there is a guarantee fee of three percent. As well, with this loan, unlike the 7(a) loan, there is a required down payment of ten percent to secure the loan in the first instance. The loan rates for these loans are anywhere between 5 to 6%. You will not know the exact rate on these loans until about 45 days after closing when your loan is pooled with others like loans.
D. The Microloan Program.
This is the last of the three SBA loan programs and is designed for those new small businesses whose needs fall below most lender's minimums. These loans can be used for working capital, furniture, and/or fixtures, machinery, and inventory or supplies. As you can tell by the name microloan, these loans are much smaller with a cap of $50,000.00. As these loans are so small and the risk much less, the SBA does not attach any guarantee fee to the loan itself. Rates on these loans will vary between 8 and 13%.
Please be apprised that many of the loans also come with documentation and legal fees attached. So, you should consider those costs as part of your decision-making process.
As a start, the Katz Law Group would recommend that you go to the Massachusetts Division of Banks website to locate a list of approved SBA lenders. Once there, you will get information as to all lenders who are currently participating in the program and the specific loan programs that they currently offer. At all times, each of these local lenders MUST work within the SBA's rules and guidelines. Please make sure that you partner with a banker that is well experienced in this process.
While these loans are not suitable for every business, we suggest that you initially discuss what options are best for you with your accountant or business financial planner before going through the tedious SBA application process. If you have any further questions, please give the Katz Law Group a call at 508-480-8202.