Small Business Administration – SBA Loans
The Small Business Administration (SBA) is a United States government agency signed into law by President Eisenhower in 1953 that provides support to small businesses. The mission of the Small Business Administration is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting the economic recovery of communities after disasters."
SBA loans are made through banks, credit unions and other lenders who partner with the SBA. The SBA provides a government-backed guarantee on 90 percent of each loan made in order to strengthen access to capital for small businesses.
Using an SBA 7(a) Loan to Buy a Business
A buyer can use an SBA 7(a) loan to help cover the expenses associated with acquiring an existing business. These loans are generally for a period of 10 years.
The SBA 7(a) loan is a government-backed loan provided by financial institutions such as banks and credit unions. The SBA doesn't lend directly, but they insure these loans in the event of a borrower default. This makes the SBA 7(a) loan an attractive option for lenders since it reduces most of the risk involved. A buyer can use an SBA 7(a) loan for a variety of purposes, including the purchase of real estate, equipment, working capital, refinancing debt, and buying a business.
A buyer must be a prime borrower to qualify for an SBA loan. However, it's generally easier to obtain a loan to buy an existing business than it is to get a startup loan because lenders can see the track record of the business you're intending to acquire.
SBA 7(a) loans have attractive interest rates, repayment terms, and closing costs, but they do have stricter qualification requirements than other business loans.
Generally, in order to qualify for an SBA 7(a) loan you'll need:
- A FICO score of at least 690;
- A record free of any bankruptcies in the past three years;
- At least a 10% down payment;
- For franchisees, a paid franchise fee before the loan funds are released;
- A clean criminal history, or the ability to explain any misdemeanors on your record;
- No current federal debt; and
- Industry or managerial experience (to prove you're qualified to run the business you want to buy).
In addition, the business will generally need to be:
- A for-profit entity,
- A small business by definition,
- Based in the United States,
- A business with invested equity, and
- A business that has exhausted its other financing options.
In addition to the SBA's backing, lenders also like to reduce their risk by requiring the borrower to make a down payment. Even if the business you're buying is very profitable, there is still a chance that it could fail. Because of this, the lender will likely still require you to put up some collateral to secure the loan. This collateral could include:
- Real estate,
- Accounts receivable, and/or
- Other business or personal assets.
It's important to remember that lenders may discount the value of the collateral you pledge against the loan. That's because many types of collateral (such as vehicles) lose value over time. Alternately, a lender might require 10 to 20% of the loan amount as a down payment.
All owners of the business who have at least 20% equity in the business will be required to guarantee the loan, and you'll need to include the names and information for each of these owners on the application. In addition, if your spouse has at least 5% equity in the business and you and your spouse's equity totals at least 20% (for example, if you have 15% equity and your spouse has 5% equity), your spouse will have to guarantee the loan as well.
However, if you are a sole proprietor, you will not need to provide a separate personal guarantee because you will execute the note yourself as a borrower (instead of as a separate business).
The business being acquired must be open and operating. The SBA will need to know what type of business you plan to buy to determine if it's likely to continue making a profit (an.d you'll be likely to pay back the loan amount). In general, the business you're planning to acquire with the loan proceeds must be:
- Profitable, and
- Established for at least 2 to 5 years.
Generally, you'll need to include the following documentation with your SBA Loan application package:
- Contract to purchase the business
- Business tax returns for the past three years
- Any outstanding business debt
- Long-term business contracts
- Documentation of business assets
- Business lease agreement
- Incorporation documents and/or business license
- Business plan.
In addition, the SBA will generally require an independent business appraisal.
To complete your application package, you'll be required to submit SBA-specific forms and documents. The forms and documents commonly required in the application package include:
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Financial statements, including a balance sheet, profit and loss, and income projection.
The SBA allows applicants to obtain help (for example, from an attorney or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you'll need to disclose who this person is as well.
Using a 504 Loan
The 504 Loan Program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation. Loans that include real estate are generally made for a period of up to 25 years.
504 loans are available through Certified Development Companies (CDCs), SBA's community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by SBA.
The maximum loan amount for a 504 loan is $5.5 million. For certain energy projects, the borrower can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total.
To be eligible for a 504 loan, your business must:
- Operate as a for-profit company in the United States or its possessions
- Have a tangible net worth of less than $15 million
- Have an average net income of less than $5 million after federal income taxes for the two years preceding your application
- Have a FICO Score of at least 690;
Other general eligibility standards include falling within SBA size guidelines, having qualified management expertise, a feasible business plan, good character and the ability to repay the loan.
Loans cannot be made to businesses engaged in nonprofit, passive, or speculative activities. For additional information on eligibility criteria and loan application requirements, small businesses and lenders are encouraged to contact a Certified Development Company in their area.
A 504 loan can be used for a range of assets that promote business growth and job creation. These include the purchase or construction of:
- Existing buildings or land
- New facilities
- Long-term machinery and equipment
Or the improvement or modernization of:
- Land, streets, utilities, parking lots and landscaping
- Existing facilities
A 504 loan cannot be used for:
- Working capital or inventory
- Consolidating, repaying or refinancing debt
- Speculation or investment in rental real estate
504 loans are available exclusively through Certified Development Companies (CDCs). Find a CDC in your area to ensure you are dealing with a qualified lender. CDCs are uniquely qualified to understand 504 loan programs.
An SBA Microloan is a loan of up to $50,000 made by an SBA approved intermediary. These intermediaries are non-profit organizations that have their own lending and credit requirements. Generally, they require some form of collateral as well as the personal guarantee of the business owner. SBA Microloans can be used to open, enhance, or improve a small business. Examples of how the proceeds can be used include: working capital, equipment, machinery, fixtures, inventory, supplies, and furniture. While the maximum loan is $50,000, the average loan runs between $20,000 and $30,000. PacificBusinessAdvisors.net can assist you in locating a local SBA approved intermediary.
Not All SBA Loans are the Same
While the SBA has minimum guidelines that all SBA lenders must follow, not all SBA loans and lenders are the same.
SBA lenders have different preferences for geographical locations, sizes of loans, and industries. Some prefer franchises, others don't.
Some lenders make SBA lending a priority, others make very few SBA loans. While SBA loans must meet minimum debt service ratios and FICO scores, some lenders are more conservative than others in underwriting SBA loans.
When it comes to interest rates, not all lenders quote the same rates.
When seeking SBA financing , it is wise to shop lenders. It also makes sense to utilize the services of a loan broker who has experience with SBA loans and lenders. They can usually help the loan applicant find the ideal lender and best terms while saving a great deal of time.