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Will an SBA 7a Loan Work For You?

written by: •edited by: Jean Scheid•updated: 6/25/2011

Need capital for your new business and wonder if an SBA startup small business loan will work for you? Jean Scheid takes a look at what the Small Business Association has to offer.

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    A Discussion of the SBA 7a Business Loan

    Money to Loan by World Lending Services 

    The Small Business Association or SBA was founded in 1953 to protect the interests of the small business owner. Their mission is to, "Help Americans start, build and grow businesses." Many new business owners often skip the SBA when it comes to obtaining loans. Why? There are horror stories out there of all the paperwork the SBA requires and others think the process is too long for their immediate needs. With the economy's downturn, this is no longer the case for startup small business loans from the SBA.

    Currently, the SBA offers three types of 7a startup small business loans. We'll take a look at each one, tell you how they work, and where you can get more information.

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    Basic 7a Loan Guarantee

    This startup loan is designed to help fund your business and it is the SBA's most popular loan as it covers almost any type of business and the loan is guaranteed through the SBA. Funds are obtained and distributed through an SBA approved lender. The SBA does not fund the loans; only guarantees them. Loan proceeds can be used for almost anything such as working capital, equipment needs including office equipment, and machinery. It even covers land and building purchases or renovations to buildings. It is attractive to business owners who lease their buildings as well; it can cover leasehold improvements.

    Loan terms are ten years if you use the 7a loan for working capital and can be up to twenty-five years for loans when fixed assets are purchased. Fixed assets include equipment, machinery, land and building and leasehold improvements. The 7a loan is a great option for both startup and existing businesses and funded through commercial lending institutions.

    To apply for an SBA Loan, visit an SBA approved lender first. The SBA 7a loan maximum is $2 million and the SBA will guarantee $1.5 million or 75% of the loan amount. The approved lender assumes the guarantee for the remaining amount. Although they are considered SBA loans, the approved lender is responsible for structuring the loan amount, terms, and interest rates. SBA 7a loans are attractive to approved lenders in the case of default. The SBA guarantees if the loan is not repaid, the lender will receive at the very least, 75% of the loan proceeds paid by the SBA.

    Interest rates vary by amount and term of the SBA 7a loan. Although the lender negotiates the interest rate, there are some guidelines they must follow. For loans of $50,000 or more, the interest rate must not be higher than prime plus 2.25% but only if the loan term is less than seven years. If the loan term is more than seven years, the interest rate must not be higher than prime plus 2.75%. Loans that are between $25,000 and $50,000 and have a loan term of less than seven years, must hold an interest rate of prime plus 3.25%. For loans seven years or more, the interest rate is prime plus 3.75%. Loans that are under $25,000 have similar interest rates of prime plus 4.25% for loans under seven years, and 4.75 for loan terms that are seven or more years.

    As with any business loan, the approved lender will require certain items:

    • Business Plan
    • Tax Returns (both personal and business if available)
    • Cash Flow Forecasting
    • Balance sheet showing assets and liabilities
    • Character Statements
    • Other funding sources
    • Amount of loan needed
    • Purpose of loan and repayment plan
    • Other additional information may be required depending upon loan terms and amount of loan.
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    CDC 504 Loan Program

    The Certified Development Company or CDC loan is called the 504 loan program. This loan falls under the SBA's 7a program and provides long-term financing to help the small business owner require real estate, machinery, equipment or for expansion or building improvements. With the 504 loan, again it is distributed through an approved lender and offers the same interest rate rules.

    What is different with the 504 loan is that the approved lender is normally a private or non-profit economic development company. Most towns have both non-profit and for profit economic development companies or departments that work with small business owners to help them make improvements to the community through their business efforts.

    In the 504 loan, the SBA guarantees 100% of the loan and holds a junior lien on property or equipment up to 40% of the total loan amount. The small business owner who opts for the 504 loan must be able to provide 10% equity toward the loan. That 10% can be cash or assets.

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    7m Microloan

    This fairly new SBA loan, the 7m Microloan is a result of the economy's downturn. With the 7m Microloan, the SBA offers loans of $35,000 or under to small businesses for capital, inventory, supplies, furniture, fixtures, equipment or machinery. This Microloan can't be used to purchase real estate or pay existing debts. Again, an SBA Micro loan must be obtained through an approved lender. Interest rates and terms are negotiated by the approved lender and are usually between 8% and 13%. Additionally, the lender helps the small business owner by providing guidance and helpful technical assistance which is required if the Microloan is utilized.

    For more information on the SBA 7a startup small business loan to help you fund your business, visit the SBA or your local bank. Most FDIC banks are approved SBA lenders. If your bank is not an SBA approved lender, here's a list of SBA Approved Lenders.