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U.S. Small Business Administration Getting Your Loan Approved Kansas City District Office, 816-426-4900
What is an SBA Loan? An SBA Loan is a business loan, not a personal loan or a grant. SBA Loans are guaranteed loans through a Lender. The amount guaranteed depends on the dollar amount of the loan and the specific program the lender may use. Any lender, including the lender you may currently do business with can do an SBA loan. A lender will review your business plan, financial information, character and credit history. Your lender will make a decision to work with you on a conventional lending basis or to seek an SBA guarantee to reduce their exposure. Some reasons a lender will request an SBA guarantee is (1) collateral available does not meet conventional requirements, (2) term needed to repay the debt is not available conventionally, (3) type of business: either a start-up or a higher risk industry.
How much can I borrow and how much of a guarantee does the lender get? The SBA’s primary lending program is referred to as the 7(a) loan guaranty program. A regular 7(a) loan has a maximum loan amount available of $2,000,000 which the Agency guarantees 75%. If the loan amount is $150,000 or less, the Agency guarantees 85%. Some lenders, because of the volume of SBA loans made and their performance history with SBA, have special designations for streamlined processing of SBA loan applications. The lender makes the credit decision and gets a loan number from SBA. Once the lender has obtained all the information they need, the turnaround from SBA is within 36 hours. The SBA Express Loan Program is a streamlined program which is very popular with lenders. An Express loan has a maximum loan amount of $350,000 which the Agency guarantees 50%. This program also allows the lender to make lines of credit.
Are there any fees associated with an SBA Loan? For example, the guarantee fee on a loan of $150,000 for a regular 7(a) loan is ($150,000 x 85% guaranty x 2% =) $2,550.00. The guarantee fee on a 50% SBA Express loan is ($150,000 x 50% guaranty x 2%=) $1,500.00. h ttp://www.sba.gov/services/financialassistance/basics/sbarole/SERV_7A_FEES.html for any fee changes SBA charges the lender a one-time guaranty fee based on the guaranteed portion of the loan amount. SBA allows the lender to pass this fee on to the borrower and it may be financed as part of the loan package. This fee is based on the application amount as follows: Additional .25% of the amount exceeding $1,000,000 Additionally, when guaranteed portion exceeds $1,000,000 3.5% of the guaranteed portion Loan amount of $700,001 up to and including $2,000,000 3% of the guaranteed portion Loan amount of $150,001 up to and including $700,000 2% of the guaranteed portion Loan amount of $150,000 or less .25% of the guaranteed portion Loan with a 1-year or less maturity Fee Loan Amount
How long can I have to repay the SBA loan? Most SBA loans have maturities from 5 to 7 years. The maximum maturity available is based on use of proceeds and as negotiated with your lender based on SBA policy: Working capital and inventory purchases 7 years Payment of accounts payable 7 years Purchase of existing business 7 years Equipment purchases 7 years Real estate purchase and construction 25 years Most SBA loans have maturities from 5 to 7 years. The maximum maturity available is based on use of proceeds and as negotiated with your lender based on SBA policy: Purchase of equipment may be eligible for a longer term if useful life in excess of 7 years is demonstrated. Loans involving multiple use of proceeds (for example, purchase of equipment and real estate) will be blended based on maximums, rather than obtaining two different loans. Debt refinancing maturity is based on original use of proceeds as outlined above.
More on Maturities
A maturity of 10 years may be available for working capital, purchase of inventory, existing business or equipment if cash flow demonstrates need for longer maturity.
Purchase of equipment may be eligible for a longer term if useful life in excess of 7 years is demonstrated.
Loans involving multiple use of proceeds (for example, purchase of equipment and real estate) may have a maturity up to the maximum for the asset class comprising the largest percentage of the use of proceeds.
Debt refinancing maturity is based on original use of proceeds as outlined above.
What if I need to purchase equipment and I also need a line of credit? In this instance, you would need two SBA loans. A regular SBA loan is a term loan with a specific maturity, regular monthly payments and does not revolve. SBA provides line of credit financing under its Capline program which utilizes asset-based financing (for further information refer to www.sba.gov) and has a maximum loan amount of $2,000,000. These loans can have maturities of one year or up to five years and may revolve. Under SBA Express (with a maximum loan amount of $350,000), a line of credit may have up to a 7-year maturity (combination of a revolving line and a term-out to provide orderly payout). You can have loans from the regular 7(a) loan program, SBA Express program and the 504 loan program (discussed on a later slide) as long as combined totals do not exceed Agency limits.
Do I need any collateral? Generally speaking, SBA expects the lender to secure a loan to the fullest extent possible with assets that are available - both business and personal assets. SBA allows the lender under the SBA Express program to do an unsecured loan up to $25,000; thereafter, the lender uses its collateral policy up to $150,000. Above $150,000, lender must secure a loan to the fullest extent possible with assets that are available. Full collateral is not a primary condition for any SBA loan; however, other aspects of the project become very important: management capability, historic earnings or projections, equity injection, and personal character and credit history.
Are the SBA loans low interest rates? Since the lender actually loans its own money under an SBA guarantee, interest rates are set by the lender and may, in some cases depending on the risk, be higher than their conventional rate. Generally, SBA allows a lender to charge up to 2.25% above prime for a loan with less than a 7-year maturity and 2.75% for a maturity of 7 years and over. For loans $50,000 and less, SBA allows lenders to charge a slightly higher rate. With the SBA Express program, the allowable interest rate spread is higher. The interest rate spread is negotiable between you and the lender and is usually driven by lending competition in your particular geographic area .
Can I get a fixed interest rate on my loan? SBA allows lenders to set up loans on a variable rate (adjusts when the prime rate changes) or a fixed rate. This is also a negotiable item between you and your lender; however, most lenders do general business loans on a variable rate basis. SBA allows lenders to put floors and ceilings so the interest rate doesn’t go below a certain amount or go above a certain amount; however, this is rarely done on a SBA loan. Lenders may set the fluctuation period on a variable rate note at monthly, quarterly, semi-annually, annually or a combination of a fixed rate for a period of time and then a fluctuating rate. In preparing your projections for revenues and expenses, you may want to consider how future rate changes may affect your operations.
How Much Money do I have to put in the project?
SBA will not allow a loan to finance 100% of a project.
Equity is determined on a case-by-case basis depending on type of business, start-up nature, strength of management and credit factors.
Equity injection means actual cash into the business for working capital, purchase of inventory or equipment, or start-up expenses.
Pledge of personal assets can offset a lower equity injection, but is not acceptable in lieu of cash injection.
Is there a special loan if I want to purchase real estate and construct a building? The SBA 504 Loan Program provides three-tiered financing for purchase of real estate or purchase of real estate and construction or, in some cases, purchase of long-lived equipment) for eligible business enterprises (see slide later in presentation). A lender participates as the first tier financing for 50% of the project on real estate for at least 10 years and equipment for at least 7 years. The SBA, through a Certified Development Company (see list of CDCs elsewhere on our website), guarantees a debenture sold on the secondary market providing fixed interest rate financing for 20 years on real estate and 10 years on equipment on a portion of the project (generally a maximum of 40%). The third tier is the equity contribution at a minimum of 10% of the project.
What needs to be in a Business Plan? A business plan precisely defines your business, identifies your goals, and serves as your firm's resume. A business plan sets out your plan for the business which is valuable as it guides you through the various phases of your business, outlines the potential for success and any obstacles, and gives information to attract investors or lenders. As a management tool, the business plan helps you track, monitor, and evaluate your progress. The business plan is a living document that you will modify as you gain knowledge and experience. By using your business plan to establish timelines and milestones, you can gage your progress and compare your projections to actual accomplishments. The SBA provides assistance in business planning through its partners and through online sample formats and tutorials (discussed in more detail in The SBA Advantage presentation).
If I have a bankruptcy does that mean I can’t get an SBA loan? A bankruptcy in your past cannot be a sole reason for a loan denial. However, SBA and lenders consider the bankruptcy as a character and credit concern. The details of the bankruptcy should be discussed with your lender. A loan cannot be made if you are still in bankruptcy, the bankruptcy must be formally discharged. The lender will want to determine that you can handle a business obligation in the agreed manner and will look at the details of the bankruptcy, look to see that you have re- established credit in a satisfactory manner since the bankruptcy and may look at credit history prior to the bankruptcy in some circumstances. There are some lenders who will not consider a business loan to an individual with a former bankruptcy as a character issue. A low credit score as a result of a bankruptcy may preclude your obtaining a loan through a streamlined method such as SBA Express.
Does it matter if I have ever been arrested? An individual who is currently incarcerated, on parole, on probation or any type of diversion program is not eligible for an SBA loan. A character issue which needs to be disclosed and discussed with your lender is any incident other than a minor traffic violation. A violation, such as a DUI/DWI, which was expunged or dropped must be disclosed as an arrest is a permanent record. A felony charge will preclude you from obtaining a loan through the streamlined process. Multiple misdemeanor recent charges (within the last 10 years) will also preclude you from obtaining a loan through the streamlined process .
More on character issues…
For documentation of a character incident, you will be asked to provide to your lender an affidavit of the incident(s), disposition of the charges and statement that the narrative discloses all incidents. This statement must be signed, dated and notarized. You may be asked to provide fingerprint cards completed by a law enforcement official to provide proper fingerprints.
All affidavits, accompanied by fingerprint cards (as necessary), are referred to SBA’s Office of Inspector General for clearance. The Inspector General’s office performs a name check and fingerprint check with a referral to the FBI.
Can I get an SBA Loan for a Mini-Storage Facility? Generally, a mini-storage facility is not an eligible business. It is considered a passive investment to obtain rental income. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds are not eligible Other related businesses that are generally ineligible include: apartment buildings, shopping centers, mobile home parks (RV parks may be eligible), antique or outlet malls. Other ineligible businesses include casinos; businesses which promote, teach or indoctrinate a specific religion; businesses engaged in providing live entertainment or products of a prurient sexual nature; businesses owned in a foreign country; and businesses or individuals who have previously defaulted on any federal government debt causing the federal agency to sustain a loss (includes compromised debt).
What special programs are available for women and minorities? SBA currently has no special financing program for certain groups (with the exception of veterans to be discussed shortly). SBA strives to address the needs of those underserved in the marketplace, including: women, veterans, native Americans, young entrepreneurs, rural and low-to-moderate income residents. This includes encouraging lenders to utilize the SBA loan guaranty program to especially provide equal credit access to all individuals. SBA may provide other assistance in the area of contracting. See additional presentation on Business Development for more information.
Is there a special SBA program for veterans? PATRIOT EXPRESS PROGRAM A pilot program has been established recently called the Patriot Express Program. To be eligible for this loan program, a business must be owned 51% or more by a veteran, individuals in transition from the service, reservists or national guard members, disabled veterans or spouses of the preceding, and widowed spouses of service members or veterans who died during service or of a service-connected disability. The maximum amount of the Patriot Express loan is $500,000 (including any outstanding SBA Express, Community Express, Patriot Express and Export Express). SBA’s maximum guaranty is 85 % for loans of $150,000 or less and 75% for loans over $150,000 up to $500,000. For loans above $350,000, lenders are required to take all available collateral. See additional presentation on Business Development for more information regarding contracting assistance.
For More Information
Loan programs: www.sba.gov
Counseling, training and business plans: The SBA Advantage presentation or www.sba.gov
List of lenders with special SBA designations in Kansas City and Springfield, MO http://www.sba.gov/localresources/district/mo/kansas/financing/index.html
Information on 504 loan program see www.sba.gov
Kansas City SBA District Office: 816-426-4900
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