What is SBA lending?


SBA loans were developed to provide financing to applicants who demonstrate repayment ability but lack adequate collateral to fully repay the loan, thereby excluding them from conventional commercial financing provided by banks.

SBA lending is financing for businesses that are operated by their owners.

A small business is generally defined as a business that grosses up to $6M annually.

There are eligibility requirements for SBA loans, but they are generally common sense, for instance, the business must be for-profit, located within the US, not promoting a religion or political agenda, nothing controversial like topless bars or gambling joints or pyramid schemes.
The owners must be here legally, not in jail or going to jail, not in the middle of lawsuit, or bankruptcy. Can't have defaulted or be in arrears on any government backed loan, for instance student loans.
Can't owe the government money (i.e. tax liens).

The business must generate cash flow. Speculative or Passive income businesses are not eligible (example: self storage units, shopping centers, flea markets, oil wild catting, etc)

There are two general categories of SBA lending: 7a and 504

504 loans are cooperatively provided by a CDC and a lender. CDCs are appointed by the SBA and usually operate within a designated geographic region. The lender in a 504 transaction can be any lending institution who agrees to participate in the transaction. The 504 program was designed to encourage banks to participate in SBA lending, however its best to stick with lenders who are familiar with SBA programs and their requirements.  Small Business Lending. 504 loans can be used for: purchase of commercial real estate, construction or renovation, and purchase of equipment. When it comes to 504 loans, think big and long term, these are fairly complicated loans which make sense for long term financing of permanent assets. Most common use of 504 is for hotel start-up or purchase, or the purchase or construction of commercial real estate. Loan terms are usually 20-30 years, fixed rates are most common.

Within 7a are several subprograms. The subprograms are generally for small loan sizes and/or special groups like veterans.

7a General program loans
SBA authorizes certain lenders to offer these loans. I believe all the lenders we represent as SBA lenders  are designated Preferred Lenders by SBA. This designation means that under normal circumstances the lender is trusted to approve without SBA credit review.

7a Loans can be used for most business needs:
 Purchase of real estate, equipment, furniture, fixtures, inventory Franchise fees, working capital, Ground up construction, renovation, leasehold improvements Business acquisitions, start-ups, expansions Refinance of business debt Loan term is based on use of proceeds. Rates are based on use of proceeds, industry, and strength of credit. Terms up to 25 years, rates no higher than P+2.75%. These loans are generally longer term than conventional financing. There are no balloons or calls. Loans are fully amortized. Prepayment penalties only on loan over 15 years

7a Program changes  effective June 15th (was May 1st)

Changes that will be relevant to you
  1. Equity injection can no longer be borrowed unless the borrower can show repayment of that debt from outside sources - sources other than the applicant business (ie spouse income or retirement income etc). Debt on full standby for the term of the loan is also acceptable.
  2. Certain new industries are now specified as ineligible for SBA lending. Home builders who build for future sale are now considered speculative. Bail bonds, pawn shops, check cashers, factoring and mortgage servicing companies are all added to the ineligible list.
  3. District Office will no longer make character determinations
  4. Now can choose weighted or term determined by the asset class which is the majority of loan proceeds. For instance, $1M loan with $550K for real estate, the loan is 25 years. Weighted, the same loan would have had a term of 18 years.
  5. TSA is now minimum environmental report. Questionnaire alone is no longer acceptable. If the real estate is or has ever been occupied by an industry known for environmental risks a Phase I will automatically be required.
  6. On Business acquisitions, the lender must ask seller to carry note for good will. The seller does not HAVE to carry note for good will, but we must request that they do and document the request and their response.
  7. Liens on personal homes can be limited to 150% of the equity in states where there are tax consequences from liens in the amount of the full loan amount. For instance if we have a $1M loan which is being secured with a home with $50K in equity, in a state like Florida which charges a tax on the mortgage, the SBA mortgage can be limited to $75,000.
  8. Construction loan require P&P bond for any loan in excess of $350K. (per NAGGL conference in May the SBA has agreed to put the waiver back in, but that change has not been released).