How to apply for a SBA-backed loan
The US Small Business Association doesn't actually make loans – it backs the loans made by banks to small businesses which might not otherwise qualify for financing.
The SBA has three basic loan programs, the basic 7(a) loan for most small business, the CDC/504 program for businesses expanding their manufacturing operations with equipment purchases, and the relatively new microlending program. Other programs exist – check www.sba.gov for more details.
Basic 7(a) Loan Program
The most basic and most used loan, of SBA's business loan programs, is the 7(a), which are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. The lender and SBA share the risk that a borrower will not be able to repay the loan in full.
The SBA looks at the repayment ability from the cash flow of the business, as well as good character, management capability, collateral, and the owner's equity contribution. If you own 20 percent or more of your company, you are required to personally guarantee payback of an SBA loan for your company.
All businesses that are considered for financing under SBA’s 7(a) loan program must meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Your company and its affiliates can’t be worth more than $8.5 million and average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years can’t be more than $3 million.
Some business have additional considerations for SBA-backed loans:
FRANCHISES - are eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.
RECREATIONAL FACILITIES AND CLUBS - are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.
FARMS AND AGRICULTURAL BUSINESSES - are eligible; however, these applicants should first explore the Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA.
FISHING VESSELS - are eligible; however, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.
MEDICAL FACILITIES - hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they are licensed by the appropriate government agency and services rendered go beyond those of room and board.
The SBA's 7(a) Loan Program has a maximum loan amount of $2 million dollars with a maximum exposure of $1.5 million. Thus, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent. SBAExpress loans have a maximum guaranty set at 50 percent. The maximum length of a SBA-backed loan is generally 25 years for real estate and equipment; and, generally, seven years for working capital.
Interest rates may be fixed or variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25 percent if the maturity is less than 7 years, and Prime Plus 2.75 percent if the maturity is 7 years or more. For loans between $25,000 and $50,000, maximum rates must not exceed Prime Plus 3.25 percent if the maturity is less than 7 years, and Prime Plus 3.75 percent if the maturity is 7 years or more. For loans of $25,000 or less, the maximum interest rate must not exceed Prime Plus 4.25 percent if the maturity is less than 7 years, and Prime Plus 4.75 percent, if the maturity is 7 years or more.
CDC/504 Program
The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
Proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.
A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, with each covering a specific geographic area. For more information, look here: [http://www.sba.gov/services/financialassistance/sbaloantopics/cdc504/index.html]
SBA Microloans
The Microloan program provides very small loans to start-up, newly established, or growing small business concerns. Nonprofit community based lenders make these SBA-backed loans to eligible borrowers, up to a maximum of $35,000. The average loan size is about $13,000.
The maximum term allowed for a microloan is six years. Interest rates vary, depending upon the intermediary lender and costs to the intermediary, but generally these rates will be between eight percent and thirteen percent.
Each intermediary lender has its own lending and credit requirements. However, business owners contemplating application for a microloan should be aware that intermediaries will generally require some type of collateral, and the personal guarantee of the business owner.
Currently, microlenders can be found in every state except Alaska, Rhode Island, Utah and West Virginia. Rhode Island is currently being serviced by South Eastern Economic Development out of Taunton, Mass., and a portion of West Virginia is being serviced by Washington County Council on Economic Development out of Washington, Pa. For more information, look here: [http://www.sba.gov/services/financialassistance/sbaloantopics/microloans/index.html]
SBA Loan Application Checklist
Application for Business Loan - SBA Form 4
This form should be completed by you, the business owner.
Lenders Application for Guaranty or Participation - SBA Form 4i
This form should be completed by your lending institution.
2. Personal Background
Statement of Personal History - SBA Form 912
3. Personal Financial Statement
Personal Financial Statement - SBA form 413
4. Business Financial Statements
Detailed, signed Balance Sheet and Profit & Loss. Statements current (within 90 days of application) and last three (3) fiscal years Supplementary Schedules required on Current Financial Statements.
5. Projected Financial Statements
Detailed one (1) year projection of Income & Finances (please attach written explanation as to how you expect to achieve same).
6. Ownership and Affiliations
A list of names and addresses of any subsidiaries and affiliates, including concerns in which the applicant holds a controlling (but not necessarily a majority) interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with the applicant.
7. Business Certificate / License
Certificate of Doing Business (If a corporation, stamp corporate seal on SBA Form 4 section 12).
8. Loan Application History
By Law, the SBA may not guarantee a loan if a business can obtain funds on reasonable terms from a bank or other private source. A borrower therefore must first seek private financing.
A company must be independently owned and operated, not dominant in its field and must meet certain standards of size in terms of employees or annual receipts. Loans cannot b made to speculative businesses, newspapers, or businesses engaged in gambling.
Applicants for loans must also agree to comply with SBA regulation that there will be no discrimination in employment or services to the public, based on race, color, religion, national origin, sex or marital status.
9. Business Income Tax Returns
Signed Business Federal Income Tax Returns for previous three (3) year.
10. Personal Tax Returns
Signed Personal Federal Income Tax Returns of principals for previous three (3) years.
11. Resumes
Personal Resume including business experience of each principal.
12. Business Overview and History
Brief history of the business and its problems. Include an explanation of why the SBA loan is needed and how it will help the business.
13. Business Lease
Copy of Business Lease (or note from landlord) giving terms of proposed lease.
14. For purchasing an existing business:
a. Current Balance Sheet and Profit & Loss Statement of business to be purchased.
b. Previous two (2) years Federal Income Tax Returns of the business.
c. Propose Bill of Sale Including: Terms of Sale.
d. Asking Price with schedule of:
1. Inventory
2. Machinery & Equipment
3. Furniture & Fixtures
