Definition: Term loans from a bank or commercial lending institution that the SBA guarantees as much as 80 percent of the loan principal.
SBA financing programs vary depending on a borrower’s needs. SBA-guaranteed loans are made by a private lender and guaranteed up to 80 percent by the SBA, which helps reduce the lender’s risk and helps the lender provide financing that’s otherwise unavailable at reasonable terms.
Here’s a rundown of some popular SBA loan programs:
7(a) Guaranteed Loan Program
The SBA’s primary business loan program is the 7(a) General Business Loan Guaranty Program. It’s generally used for business start-ups and to meet various short- and long-term needs of existing businesses, such as equipment purchase, working capital, leasehold improvements, inventory, or real estate purchase. These loans are generally guaranteed up to $750,000. The guaranty rate is 80 percent on loans of $100,000 or less and 75 percent on loans more than $100,000.
The guidelines for SBA guaranteed loans are similar to those for standard bank loans. In addition, your company must qualify as a small business according to SBA standards, which vary from industry to industry.
The interest rate charged on SBA guaranteed loans is based on the prime rate. While the SBA does not set interest rates, since they are not the lender, it does regulate the amount of interest that a lender may charge an SBA borrower. If the loan has a term of seven years or more, the SBA allows the lender to charge as much as 2.75 percent above the prevailing prime rate. If the loan has a term of less than seven years, the surcharge can be as much as 2.25 percent.
You can use the following assets as collateral for an SBA guaranteed loan:
• Land and/or buildings
• Machinery and/or equipment
• Real estate and/or chattel mortgages
• Warehouse receipts for marketable merchandise
• Personal endorsement of a guarantor (a friend who is able and willing to pay off the loan if you are unable to)
• Accounts receivable
• Savings accounts
• Life insurance policies
• Stocks and bonds
Accuracy is of utmost importance. Keep notes on everything that goes into the loan package as backup in the event you are called on to explain or prove a figure or statement on any of the documents.
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