What is SBA Lending?
The Small Business Administration (SBA) is an Agency of the United States Government authorized to provide business loans to American Small Businesses. SBA loans are actually underwritten and offered by regulated banks, credit unions or community-based lenders that meet the SBA’s criteria. The SBA provides the actual lender with a guaranty from 50%-90% of the loan amount to reduce the lender’s risk of default by the borrower, thereby increasing access to financing for small businesses. The SBA has a variety of loan programs which are distinguished by their different uses of the loan proceeds, their dollar amounts and the requirements placed upon both the borrow and the lender. The most common SBA programs are the 7(a) Loan Program and the Certified Development Company or 504 Loan Program.
What are the Benefits?
- Funding amounts up to $5,000,000
- Low Interest – Interest Rates Controlled by SBA Program Mandates
- Long-Term Funding: Maximum of 25 years for Real Estate; up to 10 years for Equipment, up to 7 years for Working Capital
- Government Backed Provides Access to Financing Otherwise Not Available
How Does It Work?
Similar to any traditional bank financing, the financing request is evaluated by an SBA authorized lender against a number of key criteria. In addition to the amount of funding sought, the expected use of the funding and the size/nature of the business, the most important of these criteria are typically; the business borrower’s Credit, their personal injection of money into the business, their collateral to help secure the loan, their experience in the type of business they are looking to finance and their secondary income (separate from that expected from the new business).
The initial underwriting process requires a detailed review of the borrower’s credit, their financial data (including assets), and a well-developed business plan and financial projections. If the initial results of the review appear positive, more formal underwriting and due diligence occurs. The entire process typically requires from 45-120 days or more to achieve funding.
Most every SBA-guaranteed loan program uses the same basic qualification criteria of size of the business, the nature of the business, the use of proceeds and the credit and personal assets of the business and it’s principal owners (see www.sba.gov to review). In addition:
- Every loan must be for a sound business purpose
- There must be sufficient invested equity in the business (typically 1/5-1/3 of the desired loan amount) so it can be financially sound
- Every loan must be secured by all available assets (both business and personal) until the recovery value of the assets equals the loan amount or until all assets have been pledged to the extent they’re available
- The owners must be of good character and reputation
- All loans should be sound enough to reasonably assure repayment
“The SBA provides the actual lender with a guaranty from 50%-90% of the loan amount to reduce the lender’s risk of default by the borrower, thereby increasing access to financing for small businesses.”
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