Is An SBA Loan Right For Your Business?

by David Morris

Looking for a loan for your small business or have you been turned down for a conventional loan? The Small Business Administration has various loan programs suited for small businesses; the most common loan program is 7a.
The 7a loan doesn’t come directly from SBA rather, an authorized SBA lender (a bank, for example) endorses the loan and the SBA guarantees a portion of it reducing the risk for the bank. This guaranty allows the bank to make a loan that it may have otherwise turned down.

The federal government has a vested interest to encourage small business growth (higher employment opportunities). As a result, some SBA loans have less stringent requirements for owner’s equity and collateral than conventional commercial loans, making the SBA and excellent financing source for startups, franchising, working capital and more.

Who is eligible for SBA 7a?

The lender/bank determines the borrower’s eligibility so a lot depends on the credit-tolerance of the lender but, borrowers must meet minimum SBA eligibility standards such as:

• Operate a for-profit business; Possess reasonable owner equity to invest; Demonstrate a need for the loan; Conduct the business in the United States; Management capability and reasonable experience in the industry.

How can loans from SBA 7a be used?

Small businesses who obtain loans from the 7a program can use the proceeds to purchase equipment/inventory, augment working capital, refinance debt, purchase owner-occupied commercial real estate, start a new business/franchise or purchase an existing business. SBA 7a loans are from $50,000 to $5 million with the amortization, in general, from 10 years on working capital and equipment up to 30 years for real estate. Interest rates vary but the lender cannot exceed SBA’s guidelines.

What are the Eligibility Guidelines?

Lenders apply the same criteria they would with a traditional loan, but thanks to the SBA guaranty, some standards may be relaxed. The lender will judge a business based on several factors:
• Equity investment – The more skin-in-the-game the better.
• Cash Flow – Does the business plan show enough cash flow to meet the debt obligation?
• Collateral – What does the borrower(s) have of monetary value for collateral in the event of default?
• Management – Does the borrower(s) have sufficient experience/background?

Finally, SBA loans can originate from most institutions/bank anywhere in the U.S. and can be structured to accommodate state-to-state income tax practices. To apply or learn more about the SBA programs, most banks and will walk prospective borrowers through the application process.

David Morris is vice president, Fortune Bank – SBA Specialist. He can be reached at (314) 504-7277 or dmorris@fortunefincorp.com.