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How to Land an SBA Loan

Get the basics on the most common Small Business Administration programs and what’s involved in securing the funding.

March 2011
by Ron Box/Journal of Accountancy

With all of the uncertainty around maintaining a predictable flow of capital to businesses, a commercial loan provided by a bank but guaranteed by the federal government almost sounds too good to be true. Standing behind such loans is one of the responsibilities of the U.S. Small Business Administration’s (SBA) Guaranteed Loans Program.

So, why do many businesses intentionally bypass the SBA and take their chances through the normal commercial bank underwriting process? This article examines the pros and cons of major SBA loan programs and helps CPAs determine if an SBA loan is the best alternative.

Understanding SBA Loan Programs

The SBA offers several primary loan programs geared toward supporting different aspects of the small business community. To qualify as a small business under current law, a business must demonstrate that it has less than $15 million in tangible net worth and two years’ net income after taxes of less than $5 million. From this point, various SBA programs have other qualification criteria. Here are summaries of the most popular programs:

7(a) Loan Program

This is the SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. Under this program, the SBA guarantees loans made by participating commercial lending institutions. Possible loan maturities are available up to 10 years for working capital and generally up to 25 years for fixed assets.

504 Loan Program

This program provides long-term, fixed-rate financing for expansion or modernization. It is backed by the SBA but delivered by Certified Development Companies (CDCs) — private, nonprofit corporations set up to contribute to the economic development of their communities.

Proceeds from 504 loans must be used for fixed-asset projects, such as:

  • Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping.
  • Constructing new facilities or modernizing, renovating or converting existing facilities.
  • Purchasing long-term machinery and equipment.

The 504 program cannot be used for working capital or inventory, consolidating or repaying debt or refinancing. Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 years or 20 years are available. Fees total approximately three percent of the debenture and may be financed with the loan. Generally, the project assets being financed are used as collateral. Personal guarantees from the principal owners are required.

Microloan Program

This program provides small, short-term loans for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. It is designed for small businesses and nonprofit child care centers and is delivered through specially designated intermediary lenders (nonprofit organizations with experience in lending and technical assistance).

Loan terms vary according to the size of the loan, the planned use of the funds, the requirements of the intermediary lender and the needs of the small business borrower. The maximum term allowed for a microloan is six years. Interest rates vary, depending on the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally, these rates will be between eight percent and 13 percent. Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral and the personal guarantee of the business owner.

In recognition of the important role small business plays in a healthy economy, lawmakers passed the Small Business Jobs Act of 2010 (PL 111–240), which expands loan programs through the SBA, strengthens small business preference programs for federal government projects, provides incentives for exporters, offers a variety of small business tax breaks and includes some revenue raisers. For more on the changes resulting from the bill, see the JofA articles “Act 2 for Business Tax Incentives” and “Highlights of the Small Business Stimulus Act.”

Why Consider an SBA Loan?

For many businesses, the benefits of an SBA-guaranteed loan include having access to capital where traditional commercial loans may not be available. Startups and young businesses without a sustained history of financial performance may find an SBA-guaranteed loan especially attractive. For businesses with cash flow issues, an SBA loan can restructure debt at better terms by providing longer loan maturities and lower payments. Businesses without sufficient collateral to obtain a traditional commercial loan may find an SBA loan particularly useful.

It is very difficult at this time for lenders to underwrite the strength and long-term viability of a borrower’s ability to repay the proposed debt. In this unusually challenging economic cycle where real estate values are declining, it is also difficult to ascertain the future value of collateral,” said Jan Roberts of Capital Solutions, a firm based in Birmingham, Ala., specializing in SBA loan advisory services. “SBA provides the backup ‘insurance’ in order to be able to service the borrower’s loan needs.” Capital Solutions is managed by Roberts, Nicole Reed and Mike Vance, who are loan originating agents for Foundation Capital and other SBA CDCs.

This article has been excerpted from the Journal of Accountancy. View the full article here.