Everything You Need To Know About SBA Loans for Your Startup
Here are the eligibility criteria and the latest descriptions for the SBA’s three most popular loan programs. Check out which one is best suited for your startup:
7(a) Loan Program
The 7(a) is SBA’s most famous loan program. As a small-business owner, you may get up to $750,000 from the local 7(a) lender, backed up by the partial assurance from the SBA. But SBAs does not lend money directly. They are making it less risky for the local lender to help you with financing. The 7(a) loans are normally used for asset purchases, working capital, and leasehold improvements. Owners of the business who hold any ownership stake of 20% or more need to personally guarantee the loan.
Once the lender decides that 7(a) money matches your need, you will start hearing the names of various 7(a) programs. For instance, if you are borrowing less than $150,000, you will be headed toward the Lowdoc program created to reduce burdensome paperwork. The SBA responds to the applications within 36 hours.
This program is aimed for lenders with good SBA lending track record. It aims at getting money, as much as $250,000, quickly in hands of the entrepreneurs. Based upon the success of SBA Express program, the SBA initiated Community Express, is designed to improve the access to capital for low as well as moderate income entrepreneurs also to offer both pre and post loan technical help.
The eligibility criteria for 7(a) program is normally the broadest of all SBA loan programs, however, they are still quite restrictive for the startups and trades related to financial services. Refer to this page on the SBA’s website for the list of types of business that are eligible. Normally, all SBA programs are targeted for small companies i.e. businesses worth less than $7 million in a tangible net worth and lesser than $2.5 million in the net income. However, a lot of banks typically don’t lend to startup businesses that don’t have 2 -3 years’ worth of financial statements and some owner’s equity to the business. Some banks also allow you to utilize the money from relatives as a part of your equity, however, you are required to formalize the small business loans with the repayment plan that is subordinate to banks debt.
504 Loan Program
The 504 loan program is planned to supply funds for the asset purchase, like land or equipment. Normally, the asset purchase are funded by the loan from a bank or from lender in your locality, along with the second loan from any certified development company (CDC) that is funded with the SBA guarantee for up to 40% of the value of the assets–which is a loan of minimum $1 million and a contribution of 10% from the equity of the borrower. This financing structure assists the primary lender, “the bank” to reduce its exposure by relying on– CDC and SBA in order to shoulder much of the risks.
Just like 7(a) program, 504 programs are also restricted to small businesses with minimum $7 million as tangible net worth and lesser than $2.5 million as their net income. But, since the funds from 504 loans can not be used for working capital, inventory, consolidating, repaying debt, and refinancing. This program excludes most of the service businesses that require purchasing land or equipment. Personal guarantees are also needed for 504 loans.
7(m) Microloan Program
The Microloan program is currently under budgetary review. The program is planned to provide a “small” loans of minimum $35,000 that could be used for a wider range of purposes to establish and grow a business. Unlike the 7(a) program, the funds don’t come from the banks; instead, they directly come from the SBA and are administered to owners through non-profit community-based mediators. To find the name of the intermediary micro lender in your locality, visit here.
The Microloan program is very startup friendly. All new startups are eligible to apply. Though the maximum loan amount is approximately $35,000, and the average loan is $10,000. The only catch is “Microloan borrowers have to enroll in the technical assistance classes that are administered by the micro lender mediators”. For some entrepreneurs, it’s a very helpful resource that offers cost-effective business training. While others, perceive it as a waste of time. Eith way it is a necessary pre-requirement to getting a Microloan.
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