For our next article, we wanted to talk about how to get SBA loans. Several of our clients purchase SBA-ready business plans and are not 100% sure how the process works. We thought we should help shed some light on what they are, how they work, and the steps to get the loan.
What is an SBA loan?
SBA loans are term loans from a bank or commercial lending institution of up to 10 years, with the Small Business Administration (SBA) guaranteeing up to 80 percent of the loan principal.
Who are SBA loans for?
SBA loans are for established small businesses capable of repaying a loan out of cash flow, but whose principals may be looking for a longer term to reduce payments or may have inadequate corporate or personal assets to secure the loan.
How many loans are available?
Vast. The Small Business Administration guarantees about $12 billion a year in loans.
Best use of loans:
Purchase of equipment, financing the purchase of a business and, in certain cases, working capital. Guarantee from the Small Business Administration can help borrowers overcome the problems of a weak loan application associated with inadequate collateral or limited operating history.
What are the fees or cost?
Comparatively cheap when looking for other sources of loans. The maximum interest rates allowed range from maximum prime plus 6.5 percentage points to prime plus 2.75 percentage points, although lenders can and often do charge less. These rates may be higher or lower than the rates on unsecured loans. Also, banks that make SBA loans cannot charge “commitment fees” for agreeing to make a loan, or prepayment fees on loans less than 15 years (a prepayment penalty applies to longer loans), which means that the effective rates for these loans can be, in some cases, higher than those of conventional loans.
Ease of acquisition:
Challenging. While the Small Business Administration has created streamlined approaches to loan applications, SBA’s conventional guaranty procedures and protocols pose a significant administrative and documentation challenge for most borrowers.
Range of funds normally available:
The Small Business Administration guarantees up to $1 million of loan principal.
Steps to get an SBA loan
While most banks, as well as select commercial finance companies, offer SBA loans, there are two specialized categories worth knowing about. These are Certified Lenders and Preferred Lenders, which have entered into contractual relationships with the SBA and officially participate in the Certified Lender/Preferred Lender (CLP/PLP) programs.
These lender programs were designed to be more responsive to borrowers; They accomplish this goal by assigning additional responsibilities to lenders for loan analysis, structuring, approval, servicing, and repayment, within Small Business Administration guidelines. About 850 lenders qualify for the SBA Certified Lender Program by meeting certain criteria, the most important of which, from a borrower’s perspective, is extensive experience processing SBA loan guarantees. Certified lenders account for about 4 percent of all SBA commercial loan guarantees. Since the certified bank does much of the SBA’s work, the agency offers turnaround times of three business days to process the application.
Approximately 450 lenders meet preferred lender standards. This group processes approximately 21 percent of the loans. Preferred lenders have full lending authority and, as a result, can offer a one-day turnaround on completed loan applications.
If you’re looking for a loan, the best thing to do is work with a certified or preferred lender. The SBA guarantee process is complicated at the best of times, and you want a lender that has been through it more than once.