Your SlideShare is downloading. ×
Everything Small Business Owners Need to Know About the SBA 7(a) Loan
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Everything Small Business Owners Need to Know About the SBA 7(a) Loan

700
views

Published on

The SBA 7(a) loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately …

The SBA 7(a) loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our economy at this time.

In this eBook, you'll find answers to the following commonly asked questions:

What is an SBA 7(a) loan?

How can a small business lender improve his/her chances for 7(a) loan approval?

What are the main differences between the common types of SBA loans (504 and 7(a))?

Published in: Business, Economy & Finance

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
700
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
9
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. The SBA 7(a) government-guaranteed loan program is more popular than ever during these times of economic uncertainty. Today’s financial landscape centers around a constantly changing business environment that has caused conventional bank lenders to exercise much more caution in granting loans to small businesses. Businesses can qualify for SBA loans with lower down payments, longer repayment terms, and easier qualifying criteria than are required for conventional bank loan applications. The SBA 7(a) loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our economy at this time. In this eBook, you’ll find answers to the following commonly asked questions: • What is an SBA 7(a) loan? • How can a small business lender improve his/her chances for 7(a) loan approval? • What are the main differences between the common types of SBA loans (504 and 7(a))? What is an SBA 7(a) loan? The 7(a) loan program from the United States Small Business Administration is the most common type of SBA loan, and provides financial assistance for small businesses with special requirements. Commonly referred to as a “general purpose small business loan”, SBA 7(a) loans may be used for any legitimate small business expenditure, including but not limited to the following activities: • Business real estate purchase • Business real estate new construction, remodeling, or expansion • Business acquisition • Partner buyout • Business equipment acquisition • Refinancing and debt consolidation • Business expansion and working capital
  • 2. What to Consider When Applying for an SBA 7(a) Loan While many small business owners understand the basic aspects of the loan application process, including credit history and repayment ability, they often fail to consider other factors that can influence whether or not they get approved for the small business loan. Business Management Experience The SBA loan application process is one of the most consistent models for approving and declining small business applications, but SBA lenders are constantly challenged to make their credit approval processes most effective. Statistics produced by the U.S. Small Business Administration have proven that a primary reason for a business failure, and a loan default, is inadequate management experience. For that reason, it is of prime importance for the participating SBA lender to document the SBA loan file with evidence of business management expertise.
  • 3. Industry Expertise The ideal applicant is a business owner who has already produced consistent profits in the business applying for the loan, or previously in a related industry. The least qualified applicant is a person who has never owned or managed a business before, or has no experience in the small businesses’ designated industry. For all the applicants who demonstrate a range of experience between these two extremes, it is incumbent upon the lender to document their investigation of the applicant’s educational background and practical experience to successfully manage the business borrowing the SBA loan funds. The body of proof may include one or more of the following ingredients which sway the loan decision in a positive manner: • If the primary owner/manager of the company does not have a track record of successful business management experience, a personal guarantor may be added to the loan, because his or her credentials display characteristics which are conducive to an effective advisory role in the business. • The loan application should focus upon the strengths of the primary owner/manager for the borrowing entity which are relevant to the successful management of the borrowing entity • The borrower should provide a business plan and financial projections which are so thoroughly researched and documented that the lender is swayed toward a positive assessment of their management abilities. • A new business owner may structure a short term management contract with the seller to assure a smooth ownership transition. The borrower may affiliate with a franchise to strengthen the management model for the business. In some cases, a proven franchise system prefers less experienced franchisees, because they are more trainable for the franchise management model. SBA lenders research the successes of a franchisor, and they may accept less experienced borrowers for franchise businesses if the franchise has proven itself.
  • 4. Level of Investment Every loan transaction will have a level of investment, on the part of the business owners, with which the lender finds comfort. Predicting the success of a business, and the resulting satisfactory repayment of a small business loan, is not an exact science. Every small business lender has its own individual appetite for the types and sizes of loans it wants to fund. By the same token, each lender will find comfort in granting the loan based upon the level of investment made by the borrower. The following are examples of the types of investment that a small business owner may hold in the business, and that the lender would like to see: Dollar Investment The lender will compute a debt-to-equity ratio, and compare it to industry averages and other financial benchmarks, to determine if the borrower has adequate “skin in the game”. Part of that investment includes a measure of the dollars invested in the business by the owner compared to dollars he has received from loans. Collateral Investment Even though the lender will look at the borrower’s dollar investment in the business as a measure of contributed equity, the lender will also look at the borrower’s assets offered as collateral for the loan. He may also accept other assets outside the business, pledged as additional collateral, in lieu of more cash contribution. Seller Investment Not all small business lenders will accept seller investment to help a buyer of small business assets to qualify for financing. The Small Business Administration rules, however, allow the SBA lender to accept seller standby financing for a portion of the buyer’s qualifying equity. There is a catch. The seller debt needs to “act like” equity. That means the seller will sign an SBA Standby Agreement agreeing to delay requiring payments until the SBA loan is satisfied first. It also means the SBA lender will have first lien rights on the business assets sold by the selling note holder who is permitted to file a second lien on these assets. The standby creditor earns and accrues interest on his loan, but he receives no cash payment until the SBA loan is paid off first.
  • 5. What Are the Main Differences Between SBA 504 Loans and SBA 7(a) Loans? SBA-504 and SBA-7a Comparison SBA 504 LOAN SBA 7(a) LOAN Loan Size $125,000 to over $13,000,000 $50,000 to $5,000,000 Interest Rate Fixed rate on SBA 504 second lien debenture which is fully amortized through the term of the loan. Interest rates on 504 loans are set monthly at the time of funding at an increment above the current market rate for five-year and ten-year U.S. treasury issues. Typically, a variable interest rate is negotiated with bank on first lien bank loan which is 50% of the total project cost. Typically, a variable rate adjusted quarterly Fully amortized through the term of the loan. Interest rates are negotiated between the borrower and the lender subject to SBA maximum of Prime plus 2.75% Prepayment Penalties Prepayment penalty on SBA debenture is 10%,9%,8%,7%,6%,5%,4%,3%,2%,1% for first 10 years respectively. Prepayment penalty on bank portion of financing is negotiable. Prepayment penalty is 5%,3%,1% for the first three years respectively. Eligible Business Size The SBA has established standards for small business size, but there are exceptions for certain industries. Check with your SBA lender for your business’ SBA loan eligibility. In general, privately-owned, for-profit businesses are usually eligible, while public and middle market companies are too large. The SBA has established standards for small business size, but there are exceptions for certain industries. Check with your SBA lender for your business’ SBA loan eligibility. In general, privately-owned, for-profit businesses are usually eligible, while public and middle market companies are too large. SBA debenture 20 years fully amortized – real estate loan 10 years fully amortized – equipment loan Fixed interest rate No balloon payments First lien bank loan negotiable SBA debenture 20 years fully amortized – real estate loan 10 years fully amortized – equipment loan Fixed interest rate No balloon payments First lien bank loan negotiable 50% bank loan 40% CDC loan 10% borrower down payment 90% bank loan 10% borrower down (Commercial Real Estate & Equipment only) Terms Available and Amortization Periods Loan Structure (minimum down payment requirement) Loan Purpose Loan Program Requirements Collateral Loan Fees (General Purpose) Purchase existing building Land acquisition and ground up construction (includes soft cost development fees) Expansion of existing building Finance building improvements Purchase equipment Refinance existing real estate debt Expand, acquire or start a business Purchase or construct real estate Refinance existing business debt Buy equipment Provide working capital Construct leasehold improvements Purchase inventory Partner buyout 51% owner occupancy required for existing building 60% owner occupancy required for new construction Equipment with a minimum 10 year economic life 51% owner occupancy required for existing building 60% owner occupancy required for new construction All assets financed must be used to the direct benefit of the business Generally, the project assets being financed are used as collateral Personal guaranties of the principal owners of 20% or more ownership are required Collateral is the subject assets acquired by loan proceeds May require pledge of personal assets if equity available Personal guaranties of the principal owners of 20% or more ownership are required Fees are financed in the 504 loan Fees are negotiated for the 50% bank loan accompanying the 504 loan The bank does not charge a fee. Instead, the bank collects and remits to SBA a loan guaranty fee. The fee may be financed in the transaction.
  • 6. About Bruce Hurta Bruce Hurta has extensive experience in Small Business Lending. He served in a number of commercial lending and banking capacities in his career including President of a Houston-area community bank for 6 years. Bruce also established and managed the Houston office for a non-bank small business lending company where he specialized in SBA lending for 14 years. Bruce spent 4 years as a bank examiner for the Texas Banking Department, 7 years in executive management at two community banks, and 18 years as a specialty SBA Lender. He is active in the commercial realtor and business brokerage communities, along with various business and industry organizations. Bruce is the 2013 president of the Houston Association of Government Guaranteed Lenders. In July 2009, he joined Members Choice Credit Union as the Business Lending Manager to lead their new SBA Lending Program. Click the Banner Below to View Bruce’s Blog and Learn More About Business Lending