The Small Business Administration was created to provide an alternative to conventional lending and to encourage entrepreneurship. The SBA offers a variety of loans designed to help businesses who may not qualify for conventional financing. These businesses can include start-ups or more mature companies.
SBA loans are win-win. They can jump-start a new business, help to accelerate growth for an existing business and help preserve cash. These loans enable banks to make more loans to businesses that typically cannot qualify for conventional loans.
“A lot of businesses think they aren’t eligible for SBA loans, that they are only for weak businesses or start-ups,” says Gregory T. Pendzich, a business relationship manager with Wells Fargo Bank. “But SBA loans really are viable options for almost any type of small business.”
Smart Business spoke with Pendzich about SBA loans, what kinds of loans are available and how your business can benefit from them.
What kinds of SBA loan programs are available?
There are three loan programs that business owners should be aware of: the SBA 7(a) term loan, the 504 term loan and the SBAExpress line of credit/term loan.
The 7(a) term loan can be used to fund a variety of purposes including partner buyouts, acquisition of businesses, business expansion, working capital, purchasing real estate/land, inventory and equipment. The maximum loan amount is $2 million. This loan is partially guaranteed by the federal government through the SBA.
The 504 term loan is primarily used to acquire real estate and complete building/leasehold improvements. The 504 loan can also be used to purchase larger pieces of equipment/machinery. The maximum project amount is approximately $5 million. The 504 loan is funded jointly by the SBA and the lender.
The SBAExpress loan program is primarily a line of credit product. However, it can also be offered as a term loan. The aim of this program is to provide working capital to be used for day-to-day operations, such as paying payroll or buying inventory. The maximum loan amount is $350,000. This loan is partially guaranteed by the federal government through the SBA.
What are the advantages of SBA loans?
The biggest advantages are less cash down, smaller monthly payments and longer terms — each benefits a business’s cash flow. For example, if you’re purchasing owner occupied commercial real estate using a conventional loan, you would typically have to put down 25 percent of the cost versus 10 percent for a 7(a) or 504 term loan.
SBA loans allow for longer terms/smaller payments: under the 7(a) program loan payments for a real estate loan can be stretched over 25 years and 20 years for a 504 loan. A similar conventional loan would generally allow a 10- to 15-year term.
