Loans guaranteed by the Small Business Administration are a vital source of entrepreneurial business funding. In 2017, more than 68,000 SBA-approved loans provided around $30 billion in working capital, asset financing, export support and loan refinancing. Indications are that those numbers will be even higher this year. And yet, despite these facts, many small business owners remain misinformed about what SBA loans are and what it takes to qualify for them.
For instance, there are business owners who think the SBA is the actual lender, rather than the guarantor, and that perfect credit is required. Others perceive the agency as a lender of last resort. Some assume that the SBA loan process is unavoidably long and drawn out, mired in red tape and not worth the trouble. None of these perceptions is accurate.
Not only are SBA loans potentially advantageous for all small businesses, but they are especially helpful for businesses that historically have faced greater challenges in financing. These includes women- and minority-owned businesses as well as those owned by disabled veterans. These groups received more than $18 billion in SBA loans last year.
Banks and other lenders approved by the SBA can make loans that are guaranteed by the SBA. That guarantee allows lenders to grant loans at lower rates than those of conventional loans even to borrowers with imperfect or adverse credit histories. After all, an “imperfect” credit history is not necessarily a “bad” credit history. Therefore, [each individual business’s] creditworthiness is a consideration in the loan approval process. It does not take ‘forever’ to close an SBA-approved loan. However, many loan applicants slow down the process through their own lack of preparation. The SBA has designated several of its lenders - including Savoy Bank - as “Preferred Loan Providers” (PLPs). These lenders have the authority to actually approve loans on behalf of the SBA, not merely to originate and underwrite them. This eliminates a major step in the process and also accelerates the closing process.
There are two basic guaranteed loan programs administered by the SBA: The SBA 7(a) program, covering a wide range of small-business needs; and the 504 program, which provides relatively low-cost, fixed-rate financing for fixed assets, such as real estate and machinery.
The SBA504 program works very differently from the 7(a) program. The 504 loan is secured by a small business partnership with a certified development company (CDC), a non-profit organization set up to promote economic development within a community. There are more than 260 CDC’s located throughout the U.S. Usually, the SBA itself contributes 40 percent of the project cost, with the lender covering 50 percent and the borrower the remaining 10 percent. *
In short, SBA loans are a wonderful tool if you need working capital, debt refinancing, or new facilities for expansion. Don’t allow misunderstandings, misperceptions or lack of preparation prevent your business from enjoying the advantages that SBA-guaranteed loans can bestow.
* Under certain conditions the borrower may have to contribute a higher percentage.
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