why an sba loan may be a good option for your business
A recent survey showed small business owners have more optimism and confidence than at any point in the last 10 years. The increase in optimism was driven in part by how business owners rated their current financial situation, and their expectations that their finances, business revenue and cash flow will improve in the next 12 months.
As business owners see an improving economy in 2017, some may seek credit to support the expansion of their businesses. So how does an SBA loan fit into the mix of financing choices for small businesses?
Small business owners today have a range of financing options to consider for their specific needs, including conventional business term loans and government-guaranteed term loans. If a small business needs 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) loan programs, and what type of business should consider pursuing this financing:
Why the SBA Loan Programs?
This year, thousands of America’s 28 million small business owners will turn to the SBA 7(a) and 504 programs for financing. The U.S. Small Business Administration (SBA), 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) and 504 loans, SBA lenders are able to offer an alternative to creditworthy businesses that may not be able to obtain conventional bank financing.
SBA 7(a) Eligibility
To be eligible for the 7(a) loan programs, a business must operate for profit and qualify as a small business, as defined by the SBA. Also, businesses must have a tangible net worth less than $15 million and an average net income less than $5 million after taxes for the preceding two years.
"The best way to know if an SBA loan is the right option for your business is to talk with your banker."
- Katie Todd
Basic Uses
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:
- To assist in the acquisition, operation or expansion of an existing business
- To purchase real estate, including land and buildings
- To construct a new building or renovate an existing building
- To establish a new business or assist in the acquisition, operation or expansion of an existing business
- To refinance existing business debt
Advantages
The 7(a) loan program offers businesses immediate and long-term benefits, some of which include longer terms and lower down payments, compared to other types of business financing. With longer terms, business owners typically have lower monthly payments, which allow them to retain working capital and maximize cash flow.
Fees and Interest Rates
SBA 7(a) loans that are 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.
Interest rates on the 7(a) loans are typically negotiated between the borrower and the lender and subject to SBA maximums. Both fixed and variable interest rate structures are available.
"Depending on the transaction type, lenders may also ask for a comprehensive business plan that clearly states the goals and objectives for the business."
- Katie Todd
Terms
SBA loan programs are generally intended to encourage longer-term small business financing. Loan terms are based on the business’s 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% 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” (PLP), 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.
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 your financing options, including SBA loan products, and provide guidance to help your company achieve new levels of success. In an improving economy, creditworthy small businesses can secure a great loan product with excellent terms, and use the financing to help make 2017 the launching pad for future success.
Katie Todd is a Senior Business Relationship Manager for Wells Fargo.