SBA Loan Programs
Of the top five reasons why businesses fail, two of them are because of money. 29% of small businesses run out of cash. 82% of businesses experience cash flow problems.
But there are steps a business can take to help them with their financial woes. The Small Business Administration (SBA) has loan programs that cater specifically to the needs of small businesses.
But choosing the right loan for your business is another matter. We're going through the various SBA loan programs to help you make the best choice.
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The 7(a) loan program is the most popular of all the SBA loan programs. It's also the most flexible.
Most of the 7(a) programs are used by businesses for working capital, asset purchases, and leasehold improvements. Any owner who owns a stake of more than 20% of their business is required to personally guarantee the loan.
The SBA provides a maximum guarantee of up to $5 million or 75% of the loan amount, whichever is less. For loan amounts fewer than $150,000 the maximum amount the SBA will guarantee is 85%.
Lenders working with this program cannot charge many of the usual fees associated with commercial loans. There is, however, a one-time guaranty fee that the agency charges the lender. The lender is allowed to pass that fee on to you.
If the loan is smaller than $150,000 there may be no fees associated with the loan.
To apply for this loan, you'll need two to three years of financial statements and proof of owner's equity in the business. It's also restricted to small business owners with less than $7 million in tangible net worth and less than $2.5 million in net income.
Some SBA loan programs cater to the underserved markets. Their Pre-qualification program helps pre-qualify borrowers who aren't as likely to be approved to help them obtain a loan.
Many women business owners benefit from such a program. Those who are eligible must prepare a business plan and complete the loan application.
Once approved, you receive your pre-qualification letter from the SBA. Since the SBA is providing the business with a guarantee, banks are more likely to approve the loan.
SBA loan programs include one where there's a collection of revolving and nonrevolving lines of credit. They're called CAPLines and they're perfect for businesses needing working capital on a short-term or cyclical basis.
The CAPLines program acts similarly to a credit card. You carry a balance and can either add to the balance or pay it down, depending on the needs of your business.
If you choose a nonrevolving line of credit, you borrow a set amount and then pay it off over a set period of time.
These loans are guaranteed up to $5 million and there are four loan and line-of-credit programs operating within the CAPLines program.
There's a seasonal line of credit. It's designed to help businesses out during their peak seasons. It provides them with much-needed money to handle increases in their inventory, accounts receivable, and labor costs.
Contract lines of credit are used to finance any labor and materials needed when carrying out contracts.
The Builders line of credit is perfect for small contractors and developers. It provides them with financing they need to either construct or rehabilitate a residential or commercial property being sold to a third party.
The working capital line of credit is a revolving line of credit up to $5 million. It's used to provide short-term working capital. Most businesses use this line of credit to provide credit to their own customers. They might also only have inventory as their major asset and require additional funds.
Not every business needs a lot of money to help them out. Luckily, there are SBA loan programs for nearly every type of business need. The MicroLoan Program helps small businesses obtain loans up to $50,000.
You can use these loans to buy machinery and equipment, inventory, supplies, furniture and fixtures, and even for working capital. What you can't use this loan for is to pay off your existing debts or purchase real estate.
It's one of the more unique SBA loan programs offered because it helps borrowers who don't tend to meet the credit standards most traditional lenders are looking for them to meet.
To apply for this loan, you may be required to complete business-skills training prior to being considered. The maximum term is six years. Interest rates vary.
SBA loan programs are equal opportunity programs. They realize not everyone has the same advantages in business.
To help those entrepreneurs succeed, the 8(a) program allows certified socially and economically disadvantaged companies to enter the federal procurement market.
It's regarded as a starter program for minority-owned businesses, so they must leave the program after nine years.
Those participating are also eligible for the 7(a) and Pre-qualification Programs. To qualify, you must prove a net worth of less than $250,00 with assets under $4 million.
Two years worth of tax returns must be supplied and at least 51% of the business must be owned by the applicant.
The 504 loan program is similar to the 7(a) program in that it's only eligible to small business owners with less than $7 million in tangible net worth and less than $2.5 million in net income.
Out of all the SBA loan programs, this one is intended to supply funds for asset purchases. Usually, that means land or equipment.
Normally the asset purchase is funded by a loan from a bank or other lender. There's also a second loan from a certified development company (CDC). The CDC is funded with an SBA guarantee that's up to 40% of the value of the asset.
Generally, that means a loan of up to $1 million. There also needs to be a contribution of 10% from the equity of the borrower.
It's structured that way to reduce the primary lender's risk (usually the bank) by relying on the CDC and SBA to take on the risk.
It's worth noting that these funds can't be used for working capital or inventory. It also can't be used for repaying debts or refinancing. For that reason, the program often excludes most service businesses looking to purchase land or equipment.
Like most bank loans, one condition of an SBA loan where you are not the direct borrower is that you must sign a personal guarantee. This means that you agree to personally pay for any deficiency in the event of default. Moreover, in certain situations, the SBA loan will require you to pledge your personal residence or other real estate as collateral for the loan. As such, if there is an SBA loan default, your house or other real estate could be sold at foreclosure to pay for the deficiency on the SBA loan default.
Unfortunately, sometimes the unexpected occurs and you find you're having difficulty repaying back your loan. Maybe you've already even defaulted and you're not sure what your next step is
It's time to hire an attorney. We'll provide you with real solutions. Click here for a case evaluation.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Client personally guaranteed SBA 7(a) loan balance of over $150,000. Business failed and eventually shut down. SBA then pursued client for the balance. We intervened and was able to present an SBA OIC that was accepted for $30,000.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
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