Support for small-business growth and development also continues to be a priority for policymakers this year. So what does that mean for small businesses?
Small-business owners have a range of financing options to consider for their specific needs, including conventional business term loans and government-guaranteed term loans. For many small businesses that need funds for a real estate purchase and expansion, or to acquire another business and manage cash flow, the SBA 7(a) term loan is a great option to consider. Here are a few quick facts on SBA 7(a) loans and what type of business should consider pursuing this financing.
Why the SBA 7(a) program?
This year, thousands of America’s 28 million small-business owners will turn to the SBA 7(a) program for financing. The U.S. Small Business Administration, which does not directly make loans, provides a guarantee for SBA loans made to small businesses by banks and other lending institutions. Because the SBA guarantees a portion of the 7(a) loan, SBA lenders are able to offer an alternative to creditworthy business owners who may not be able to obtain conventional bank financing. Anticipating growth in the program, Congress has provided the SBA with a record loan authorization for the 2016 fiscal year.
SBA 7(a) loan eligibility
To be eligible for the 7(a) loan program, a business must operate for profit and qualify as a small business, as defined by the SBA. Also, businesses cannot have a tangible net worth that exceeds $15 million or an average net income of greater than $5 million over the past two years. For more information on eligibility, the U.S. SBA has identified specific businesses that are not eligible for 7(a) loans.
If you apply and are awarded a 7(a) loan, you can use the loan proceeds to help finance a large variety of business purposes. Typical uses of a 7(a) loan, which has a maximum amount of $5 million, include the following:
- Purchase of equipment, machinery, furniture, fixtures, supplies or materials.
- Purchase of real estate, including land and buildings.
- Construction of a new building or renovation of an existing building.
- Establishment of a new business or assistance in the acquisition, operation or expansion of an existing business.
- Refinancing existing business debt, under certain conditions.
The 7(a) loan offers flexibility, such as longer terms and lower down payments, compared to other types of business financing. With longer terms, business owners typically have lower monthly payments, which allows them to retain working capital and maximize cash flow to grow their businesses.
Fees and interest rates
Loans guaranteed by the SBA are assessed a guarantee fee. This fee – which is paid by the borrower, but can be financed as part of the loan – is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. As a way to encourage more small loans, the guarantee fees for loans less than $150,000 have been waived by the SBA.
Interest rates on 7(a) loans are typically negotiated between the borrower and the lender, and are subject to SBA maximums. Both fixed and variable interest rate structures are available.
SBA loan programs are generally intended to encourage longer-term small business financing. Loan terms are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan terms have been established: 25 years for real estate; 10 years for equipment (or demonstrated useful life); and 10 years for working capital or inventory loans.
According to statistics compiled by the U.S. SBA, approximately 95 percent of all small businesses are eligible for SBA financing. To ensure the success of an SBA loan request, a business owner should look for a bank that is part of the SBA “preferred lenders program” as PLP providers have been delegated by the SBA for loan approvals, closing and servicing authority. As experts in the field, SBA loan officers at banks have the knowledge and experience to streamline the application process and can determine the best program for your needs.
Depending on the transaction type, lenders may also ask for a comprehensive business plan that clearly states the goals and objectives for the business, as well as information about your experience and management capabilities.
Check with your banker for specific support in preparing or updating your business plan. Once you have decided to apply for a loan guaranteed by the SBA, use this checklist to ensure you have all the necessary documents for your application.
The best way to know if an SBA loan is the right option for your business is to talk with your banker.
A full-service provider of financial services can you help you evaluate all of your financing options, including SBA loan products, and provide guidance to help your company achieve new levels of success. In an improving economy, small businesses have the opportunity to secure a great loan product with excellent terms and help make 2016 the launching pad for future success.
Katrina Tracy can be reached at firstname.lastname@example.org
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