SBA Loan Program Explained

Many prospective business buyers look to the Small Business Administration when purchasing a business.  The SBA loan is the most commonly used business acquisition loan available today. The two available loans through the SBA are the 7(a) and 504 loans.

The 7(a) Loan Program, SBA’s most common loan program, includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase, but it can also be used for:

·       Short- and long-term working capital

·       Refinancing current business debt

·       Purchasing furniture, fixtures, and supplies

 The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates.

The 504 Loan Program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation.  A 504 loan can be used for a range of assets that promote business growth and job creation. The maximum loan amount for a 504 loan is also $5 million. 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

 Your lender will help you figure out which type of loan is best suited for your needs.

Key advantages to each SBA loan compared to conventional loans

7(a):

·       More repayment options

·       No prepayment penalties

·       Longer repayment terms

·       Most fees are financed (closing fees and soft costs)

·       Lower initial cash investment/buyer equity injection required

o   10% minimum vs. 25% and greater for conventional. This allows the borrower/buyer to keep cash on hand to help grow the business.  

·       More flexible with equity and collateral requirements

·       No balloon payments

·       Typically, SBA interest rates are more favorable than a conventional loan

·       The SBA does not limit the number of 7(a) loans to a given business/borrower

o   The limit is $5 million in loans outstanding to any borrower at any given time.

·       Borrowers who don’t qualify for conventional financing can often be approved for SBA financing

·       SBA loans can work in tandem with seller carryback/financing.  Banks are more willing to approve the loan when they know the seller has vested interest in the buyer’s success

504

·       The SBA 504 loan program has many of the same advantages as the SBA 7(a) loan program

o    The 504 typically serves the real estate portion of a business acquisition and equipment financing.

·       Many 504 loans can be approved with 10% down when most commercial lenders want 25-30%.

·       504 also allows you to finance the closing cost and soft costs – allowing you to save more cash

·       More predictable payments than conventional commercial loans due to structure

·       It is long-term fully amortized financing with no balloon payments or financial covenants

Contact us today with questions here.