The Small Business Administration (SBA) offers several lending programs. The flagship program is the 7 (a) loan program. SBA rules and guidelines can be pretty complicated so it is always best to find a bank or non-bank SBA lender that has the Preferred Lender Status (PLP) from the SBA. Once you find the right bank, find a lending officer in the bank who knows and understands all the various SBA lending rules. This will greatly increase your chances of success, because a loan officer who knows the rules and guidelines have a far higher success rate for making these complex loans. Business Eligibility: Both they type of business and the owner has to pass SBA eligibility rules which are extensive and complex. Most businesses will qualify, except ones that are involved in gambling, real estate investments, pyramid sales schemes, lending activities, and non-profit or charitable activities. Using 7(a) loans to buy a franchise is the most common way to finance a franchise purchase. Many franchises have been pre-approved by the SBA, making the process somewhat simpler. Using proceeds to purchase a business makes sense, but understand that only 15% of the loan proceeds can be used for working capital and good will per se can not be financed.
Size: SBA's 7(a) Loan Program has a maximum loan amount of $2 million dollars. SBA's maximum exposure is $1.5 million. Thus, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent. Lender: As I mentioned in my last post, banks and non-bank lenders that are SBA PLP lenders are the place to start. Do your homework and find a lender that makes many SBA loans during the year. Once you have found the lender, find a loan officer for the lender that is seasoned and experienced with SBA loans. There is a lot of work to do to put together an SBA loan and some lenders will send you to a “packager,” who collects and prepares all the documentation in the format that the SBA requires.
Costs: Although capital is available through SBA guaranteed loans, the cost is fairly expensive. Among the costs are:Packaging Fee: varies but a good average is $2,500. Commitment Fee: varies by lender from 1% to 3% of the total amount of the loan. Loan Guarantee Fee: this fee goes to the SBA and is a fee charged on the amount the SBA guarantees which is usually 75%
Rates: depends on the lender, most float with the prime rate at a low rate of .5% over Prime to a high of 3% over prime.Other Considerations: The most important other consideration when thinking about an SBA 7(a) loan is collateral and UCC filings. The SBA will want a blanket on all assets of a business. If your business needs working capital in addition to purchase money to buy assets, you should consider setting up a working capital line of credit simultaneous to or before you seek the 7(a) loan. It is much easier to obtain this working capital loan before or at the same time you set up an SBA loan than it is later when you have to ask the SBA and the lender to release some of their collateral.