Finance Your Own Business. Garrett Sutton
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7(a) loan may be used to:
• Purchase land or buildings, including conversion of existing facilities or new construction
• Purchase equipment, supplies, furniture, and materials
• Maintain short- and long-term working capital for such things as payments on accounts receivable, seasonal financing, contract performance, construction financing, or export production
• Refinance certain business debt with unreasonable terms or conditions
• Purchase an existing business
Borrowers may not use a 7(a) loan to effect a change of ownership or practice that would not benefit the business, pay delinquent taxes or other funds held in trust or escrow, refinance existing debt that would create a loss for the lender, or for any business purpose that the lender may find to be unsound.
The eligibility criteria for 7(a) loans are the broadest of all the SBA’s guarantee programs. This program targets small businesses, which the SBA defines as “one that is independently owned and operated, is organized for profit, and is not dominant in its field.” In general, depending on the business type the business’ annual receipts may have a cap at between $2.5 to $21.5 million. And despite the loan being designed to help start-up businesses, most lenders won’t make this loan to businesses that don’t have two or three years’ worth of financial statements and an owner with equity in the business.
Under the umbrella of the 7(a) program are some specialty loan programs:
SBAExpress: Aimed at expediting the loan application process and getting loans of up to $350,000 quickly into entrepreneurs’ hands, this program targets business owners with a good borrowing track record. It involves a speedy response time of 36 hours and, often, a low interest rate. The downside of this, however, is that the expedited processing time comes with greater risk and, therefore, a lower guarantee of just 50 percent.
Small Loan Advantage: The Advantage programs also involve streamlined application processes. Guaranteeing 85 percent of loans up to $250,000 and 75 percent for amounts greater, the SBA offers this loan to larger businesses looking to borrow small amounts, which benefits businesses in underserved areas. The application for this loan is only two pages, and most of them can be approved in minutes with electronic submission.
Community Advantage: This is another Advantage program that targets underserved communities. This three-year pilot program begun in January 2015 is designed to increase the number of lenders that can make SBA 7(a) loans to distressed and underserved communities. With a maximum loan size of $250,000, this loan features streamlined paperwork, a two-page application, and an approval process of ten days or less. The program targets communities, such as minorities, women, veterans, and businesses in rural or low-income areas. Borrowers are encouraged, as part of the application process, to work with advisors on developing business plans.
CDC/504 Loan Program:
The SBA’s website says that as of January 2015, this loan program had provided $50 billion in loans and created more than two million jobs. It’s designed for small business owners looking to purchase assets or finance real estate for expansion. This program may be particularly important for businesses, for example, in which heavy machinery and rapidly advancing technology play a key role; without an injection of loan monies for such acquisitions, a business may simply be unable to compete in its field.
These loans are provided through Certified Development Companies, or CDCs, which are nonprofit corporations that promote community economic development in specific geographic areas across the country. (CDCs may be accessed through your local SBA office. You’ll find a list of SBA offices at http://www.sba.gov/about-offices-list/2.)
In a 504 loan, the SBA guarantees a CDC-provided loan of up to 40 percent of the total project cost; a participating lender kicks in 50 percent, and the borrower covers the last 10 percent. The 504 loan comes with long amortization periods, fixed interest rates, and no balloon payments. There is no maximum project size, but the maximum loan amount is $5 million.
Here is how it benefits the community and the economy to make these loans available: The program stipulates that unless your business meets specific community development standards for underserved communities as set forth by the CDC, it must either create or retain a job for each $65,000 guaranteed by the SBA (or $100,000 for small manufacturers.)
A 504 loan may be used to:
• Purchase or improve existing buildings
• Make improvements to the land
• Modernize, upgrade, retrofit, or convert existing facilities
• Purchase new machinery
A 504 loan is, of course, not accessible for start-ups. It may not be used for working capital, inventory, to refinance such debt, or to consolidate or pay off debt.
Eligible businesses must be for-profit, non-speculative entities and must be considered a small-business concern, in accordance with the SBA’s definition.
Microloan Program
As their name implies, microloans are small, short-term loans offered through microlenders, which are nonprofit economic development organizations approved by the SBA. They are usually offered to neighborhood, mom-and-pop-type businesses, or those small businesses that have credit challenges, because many people who can’t qualify for traditional bank loans may qualify for microloans.
You’ll find a list of microlenders near you on the SBA.gov website, and we will talk more about microloans in the next chapter.
Special Interest Loans:
Through the SBA’s loan program are several specialized loans designed for very particular types of businesses.
Special Purpose: These three 7(a) loans include the Community Adjustment and Investment Program (CAIP) intended to assist small businesses that have been negatively affected by NAFTA; the CAPLines Program, for businesses needing assistance with short-term or cyclical working capital needs (for instance, hiring additional workers for the holiday season); and Pollution Control loans, which provide aid to businesses looking to reduce their environmental footprint. (Know that some loans are not always available due to a lack of appropriations.)
Export Loan Programs: According to the SBA website, about 70 percent of all U.S. exporters are businesses with 20 or fewer employees. This loan program was designed by the SBA specifically to help these businesses develop or enhance their export activities. Within this category are several programs, including an Export Express Program, which offers expedited processing of loans up to $500,000; an Export Working Capital Program (EWCP), in which the SBA guarantees up to 90 percent of loans up to $5 million as credit enhancements, to assist the working capital needs of businesses involved in exporting (a category often dismissed by traditional lenders); and the International Trade Loan Program, which is intended to help businesses finance the purchase of fixed assets to develop or continue exporting activities.
Rural Lender Advantage: The Small/Rural Lender Advantage program is intended to assist small community or rural-based lenders with processing business loans of $350,000 or less. It includes a two-page application, an 80 percent loan guarantee, expedited processing, fax and online application submissions, and simplified eligibility requirements. Under this heading is the B&I Guaranteed Loan Program, a loan for small businesses in rural communities that is maintained by the U.S. Department of Agriculture, for the purposes of assisting businesses with working capital, machinery and equipment purchases, buildings and real estate, and certain types of debt refinancing.
Disaster Loans: The SBA offers several long-term, low-interest loans for businesses and individuals negatively affected by natural disasters. See SBA.gov for a complete list of disaster loan programs and eligibility requirements.
Veteran and Military Community Loans: Intended for businesses and individuals