SBA loans can be a valuable tool in pushing your business over the top if it can't qualify for traditional loans, even if you are established and have more than a handful of employees. Who qualifies for an SBA loan depends on what industry you are in. But in most cases, the limit is 500 employees, although some industries are allowed to have as many as 1,500.
Realistically, loan limits are more of a determining factor than employer size as to who can benefit. According to the SBA, the maximum loan amount for a 7(a) loan is $2 million, but the maximum amount of an SBA guarantee is $1 million, so that may limit the size of the borrowing company to fewer than 100 employees.
"When you look at the programs available, many times you are talking about only $500,000 being available," says Kevin Sherwood, vice president, team leader in the commercial banking area for FirstMerit Bank. "Unfortunately, that doesn't go real far anymore. The need may be there, but there is just not enough money available. A bigger company may need to borrow $2-,$5- or $10 million, and in that case, the SBA is not for them."
But for the growing business, the SBA can help for lesser amounts.
"We did a loan for a company last year that bought a building through a 504 loan," says George Leuca, assistant vice president business banking at FirstMerit. "They were able to get into the building with only 10 percent down, which preserved the cash they needed to make repairs. The deal was for $500,000: We took 50 percent, the SBA took 40 percent and the company paid the other 10 percent. They're up to 20 employees now and will probably have $5 million in revenues."
In another case, the bank set up a loan for two employees to buy the company they worked for, using a 504 loan to leverage the equipment.
"The SBA reduced the bank's exposure, the employees got 90 percent of the money they needed at a fixed rate," says Sherwood. "And that was for a company with 40 employees." How to reach: www.firstmerit.com
SBA isn't easy money
If you think your business could benefit from an SBA loan, approach it the same way if you were applying for a traditional loan.
The bank and the SBA are still going to want to see a profitable business -- they will not loan money to a company that doesn't have good odds of surviving to pay it back.
"The SBA offers loan guarantees that mitigate the bank's risk," says Kevin Sherwood, vice president of FirstMerit Bank. ""The SBA guarantee might be needed because of a company's weak credit. The SBA guarantee can shore up the weakness and help protect the bank's interest that will help you get the loan you want or need."
In many cases, the SBA isn't actually lending the money, the bank is. The SBA just provides a guarantee for a certain percentage of the money to offset the bank's risk to make a loan to your company more attractive.
In the past, the SBA was very focused on making loans that created more jobs. But most bankers agree that today's SBA is being very aggressive and trying to help out wherever it can.
The two most common types of SBA programs are the 7(a) Loan Guaranty Program and the 504 loan program.
* The 7(a) Loan Guaranty Program is one of the SBA's primary lending programs. It provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels.
The program operates through private-sector lenders that provide loans that are, in turn, guaranteed by the SBA. The agency has no funds for direct lending or grants.
* The 504 Certified Development Company Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
A CDC is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses.
Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC covering up to 40 percent of the cost and a contribution of at least 10 percent equity from the small business being helped.