SBA Loans

How The Procedure Works
You submit a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds; you make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Repayment plans may be tailored to each individual business.

Permissible Use of Proceeds 
You can use a 7(a) loan to: expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivables and augment working capital; refinance existing debt (with compelling reason); finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.

Terms
The length of time for repayment depends on the use of the proceeds and the ability of your business to repay:
Usually up to 7 years for working capital.
Up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment (not to exceed the useful life of the equipment).

Interest Rates
Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25% over the lowest prime rate (the lowest prime rate as published in The Wall Street Journal on the day the application is received by the SBA) for loans with maturates of less than seven years and up to 2.75% for seven years or longer. For loans under $50,000, rates may be slightly higher.

Fees
The SBA charges the lender a nominal fee to provide a guaranty, and the lender may pass this charge on to you. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with a maturity of one year or less, the fee is just 0.25% of the guaranteed portion of the loan. On loans with maturates of more than one year where the portion that the SBA guarantees is $80,000 or less, the guaranty fee is 2% of the guaranteed portion. On loans with maturates of more than one year where the SBA’s portion exceeds $80,000, the guaranty fee is figured on an incremental scale, beginning at 3%.

Collateral
You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals also may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.

Eligibility 
Your business generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years. Loans cannot be made to businesses engaged in speculation or investment.

Maximum Size Standards
The precise ceiling depends upon your company’s Standard Industrial Classification (SIC) code.
Manufacturing – from 500 to 1,500 employees;
Wholesaling – 100 employees;
Services – from $2.5 million to $21.5 million in annual receipts;
Retailing – from $5 million to $21 million;
General construction – from $13.5 million to $17 million;
Special trade construction – average annual receipts not to exceed $7 million;
Agriculture – from $0.5 million to $9 million

What You Need to Take to the Lender
Documentation requirements may vary; contact your lender for the information you must supply. Common requirements include the following:
Purpose of the loan
History of the business
Financial statements for three years (existing businesses)
Schedule of term debts (existing businesses)
Aging of accounts receivable and payable (existing businesses)
Projected opening day balance sheet (new businesses)
Lease details
Amount of investment in the business by the owner(s)
Projections of income, expenses and cash flow
Signed personal financial statements
Personal resume(s)

What the SBA Looks For. Here are the qualifications the SBA is on the lookout for
Good character
Management expertise and commitment necessary for success
Sufficient funds, including the SBA-guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase)
Feasible business plan
Adequate equity or investment in the business
Sufficient collateral
Ability to repay the loan on time from the projected operating cash flow

In addition to the standard loan guaranty, the SBA has targeted programs under 7(a) that are designed to meet specialized needs. Unless otherwise indicated, they are governed by the same rules, regulations, interest rates, fees, etc. as the regular 7(a) loan guaranty.

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