Summary of U.S. Small Business Administration’s SBA 7(a) & SBA 504 Loan Programs
Small Business Administration SBA 7(a) loan program is designed for any qualified businesses to use the proceed for any business usage, including business real estate purchase, construction, refinance, business acquisition, equipment purchase, and business working capital.
SBA loans are typically variable-rate loans tied to the lowest New York prime rate. Most SBA Lenders, which is designated lender by the U.S. Small Business Administration, offers the lowest and most competitive rates allowed under the program.
SBA business asset loan programs provide funds from $100,000 Express Loan to $2,000,000 jumbo loan to acquire:
- an existing business,
- business start-up,
- refinancing, or
- to consolidate and purchase fixed assets.
Business Loan proceeds include leasehold improvements, equipment, inventory, goodwill, working capital, and closing costs.
Benefits to Small Business Borrower:
- Long repayment terms, up to 25 years without balloon payment
- Reduced cash flow requirements, an opportunity to expand the business
- Low down payment requirements
- Competitive interest rates based on a spread over published Wall Street Journal Prime
Use of Proceed For Business Owners:
- SBA Proceed can be used for business acquisition and start-up financing
- SBA Loan proceed can be used to purchase equipment, construction build-out, or renovation of owner-occupied commercial real estate
- Business Occupied must have at least 51% for an existing building, 60% for new construction
- Purchase of fixed assets such as machinery and equipment
- Refinance or consolidate existing debts, up to 100% financing on outstanding balances
- Loan Proceeds also include inventory, working capital and closing costs and other business expansion
- SBA Loan can be amortized up to 10-25 years
- Up to 90% financing on existing commercial real estate and up to 80% financing on existing business acquisition
- Most existing businesses must show fixed debt coverage of 1.20 times or greater for two years and interim
SBA 504 Programs
The SBA 504 loan program is the U.S. Small Business Administration’s long-term financing tool for economic development. The 504 program provides growing businesses with long-term, fixed-rate financing for fixed asset projects. The program allows businesses to contribute as little as 10% equity into a project or implementation.
For loans over $2,000,000, most small business SBA lender can arrange financing through a combination financing loan or a participating loan.
- Purchasing land and improvements including existing buildings
- Grading, street improvements, utilities, parking lots, and landscaping
- Constructing new facilities, modernizing, renovating, or converting existing facilities
Typical Financing Structure
- 50% 1st Trust Deed
- 40% CDC 2nd Trust Deed
- 10% minimum down payment
Although not every business who applies for small business loan will qualify for U.S. backed SBA Loan. Most small business owners who seek SBA loans want the best of both worlds — lowest rates, longer approval and fast funding. Loan applicants spend lots of time trying to obtain SBA Loan for its low rate even though it is time consuming to get SBA Loan.To some it is worth spending just to find out if their business will get approved? Most small business owners who don’t qualify stop seeking funding altogether even though alternative funding is available in the marketplace. Just because rate is the biggest factor for seeking SBA backed loans they should not sacrifice the opportunity for their business. Most loan applicants also don’t realize that for special purpose property, minimum 15% down payment required for small business SBA Loan which could be huge capital outlay for some.
In summary, before applying for an SBA loan, you must weight all your options and do cost-savings analysis before spending months just trying to qualify for a loan. Spend your time effectively. If you think you will not get approved, you will not get approved. If you lack asset or collateral, your chance of getting funding is very slim. Know the basic minimum qualifications. Know your business strengths. Know the risk-rewards for banks.