Key Highlights

How To Get A Loan From The Small Business Administration (SBA)

  • The Small Business Administration (SBA) in not a lender, but they can guarantee money that’s being lent to out by a network of their preferred and certified lenders around the country.

  • There’s two loan programs that small business owners should know about:

  • 7A loans are the most popular type of small business loan program from the SBA. You can borrow up to $5 million from a bank that’s guaranteed by the SBA. You can use it to acquire, refinance or improve buildings, tools or equipment. Or as working capital like cash and inventory. You can also use this money to refinance existing debt or invest in business expansion.
  • 504 loans are long-term, fixed rate financing for major fixed assets that promote business growth and job creation. You can borrow up to $5.5 million with a 504 loan. The 504 loan program is more designed for capital improvements, machine, equipment and property.
  • With both programs, you have the ability to negotiate fixed or variable rates of interest on these loans. The terms for payback will vary depending on what you negotiate with your banker.

Transcript

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Gene (00:03):

Hey everybody, it’s Gene Marks, and welcome to another episode of The Hartford’s Small Biz Ahead Podcast. Thank you so much for joining me this week. I want to talk a little bit about financing and getting loans. We are operating our businesses in a very high interest environment. As you know, right now, the prime rate, as I’m recording this is around 8.5%. Most people are paying a couple of points above that, so it’s definitely more expensive to get financing. And for many small businesses, it’s a lot harder to get financing because banks are looking more closely at the loans that they’re giving out and scrutinizing them a lot more to see and make sure that those businesses can repay them. So, where are my clients going? Where should you consider to go if you need financing to grow your business?

Gene (00:46):

Well, the best place in 2024, I believe, is the Small Business Administration. The SBA. The SBA has a number of loan programs that they offer. And both these loan programs themselves, remember, the SBA does not do loans. They don’t lend money. They make, they guarantee money that’s being lent to out by a network of their preferred and certified lenders around the country. And these are banks, community banks, independent banks, minority banking organizations, independent financing firms. These are all different types of guarantees from the SBA. So, these organizations, they lend money out to small businesses like yours and mine, and that money is, for the most part, guaranteed by the federal government through the SBA. So the lenders themselves can feel free to lend the money out and know that if there is a default that takes place, they will be taken care of by the federal government.

Gene (01:53):

So, a few things to know about SBA loans. For starters, you definitely want to find a lender. So you want to go to sba.gov and look at the available lenders that are in your area. And again, they will be organizations that are physically in your area from banks and community banks and independent banks and the like, that you can go to and talk about getting financing for your business. Know that the lenders aren’t just going to like write you a check. The government has reporting requirements from them. They’re not just going to guarantee the money with no basis whatsoever. They’re going to make sure that there is a procedure in place for doing that. So these lenders are still going to be asking you for lots of financial information, forecasts, historical financial, history tax returns, as well as making sure that you’ve got your bylaws and articles of incorporations set.

Gene (02:46):

Make sure you’ve got credit authorizations there and even collateral that might need to be provided on your behalf. In fact, many of these loans are given out, still require some type of collateral on the business owner’s extent. Now, why would the banks be going through all of this if their money is guaranteed by the federal government? Because number one, it’s a headache for anybody, the bank and the government, if somebody defaults. So, they’re trying to avoid a default on that way. Because it will create more costs for them. That’s why they want you to go through this. And then also, the federal government, the SBA has rules that the banks must follow to make sure that they are doing it because the government doesn’t want taxpayer money going towards a business that was a loan that was defaulted when there wasn’t enough due diligence done in advance.

Gene (03:32):

But going to an SBA lender, that is the game this year. That is what you do now. You’re not really going to get any favorable terms. You won’t get better interest rates than you went, if you go elsewhere. What you will get though is a much higher chance of getting money from these banks than you would if they weren’t guaranteed from the federal government through the SBA. So, you want to make sure that you are doing just that. Now, the SBA has a number of loan programs, but I do want to just highlight two of them. The first is the 7A loan program. The 7A loan program is the most popular program from the SBA to small businesses. You can borrow up to $5 million from a bank that’s guaranteed by the SBA, and you can use it to acquire or refinance or improve real estate and buildings.

Gene (04:28):

You can use it for working capital, that’s cash and inventory, and to pay for other working capital needs, you can use it to refinance existing debt. You can use it to buy equipment and technology. You can use it for furniture and fixtures and supplies. You can even use it to buy out a partner or to buy another business. Those are some of the uses of it. It’s pretty flexible for what the monies can be used. And again, you can borrow up to $5 million to do that. Now, the interest rates again, are market rates. The principle and the term of payback that can range depending on what is negotiated with the bank, it could be anywhere from three years to as high as I’ve seen some clients have 10 or 12 years on some of these loans as well.

Gene (05:18):

The rates themselves can be fixed rate or variable rate loans. Again, all of this you’re going to talk about with your bankers. So it’s really a standard bank loan that’s just guaranteed by the SBA under their 7A loan program. So that’s the, that’s the first loan that you want to look at. Okay? The second loan is called a 504 loan, okay? That’s used for long-term fixed rate financing for major fixed assets, right? So these are available not necessarily through banks, but through certified development companies or CDCs. These are also made available through certain nonprofit partners and economic development partners. Again, you can find this on the SBA’s website for applicable lenders for these types of loans, again, you can borrow up to five and a half million dollars. And again, it’s not necessarily for working capital and inventory.

Gene (06:17):

It is this, these loans are for like long term investments for that’s going to create jobs. So, you can use it for existing buildings or lands. You can use it to purchase new facilities. You can purchase for machinery and equipment. You can use it for, to improve or modernize your streets or existing facilities. You just can’t use it for inventory or working capital. You can’t use it to refinance debt or speculate in real estate as well. But it could be a very, very useful loan. So again, you find that SBA lender, you ask for a 7A loan or a 504 loan. Now are you eligible for this? Well, the eligibility requirements vary a little bit among the two, but for the most part, you’re looking at being an operating business, operating for profit, not a nonprofit.

Gene (07:08):

Being located in the US you have to be under 500 employees. Sometimes that definition may be a little bit more flexible. You can’t be an ineligible business. There are certain businesses that are excluded from this. Nonprofits are one, but others are ineligible depending on the types of products or services you provide. So you want to check with the, with your banker on this. And you have to be obviously unable to obtain credit from other sources. And you need to be credit worthy and demonstrate a reasonable ability to repay the loan. So those are the general eligibility requirements. But again, your banker can go through with you what they are via specifically one final thing. The SBA recently announced that they’ve expanded their 7A loan program to provide more working capital loans at more flexible interest rates.

Gene (08:00):

Now, these loans themselves, the interest rates are still like five points above prime, but they’re well below what you would pay for a credit card. So they’re trying to encourage more people to refinance their credit cards with an SBA loan. And again, higher interest rates, but still less than what you have on a credit card because a lot of us have credit card debt that we maintain and we know credit card interest rates are really high. DSBA provides a solution for that under the new working capital loan program, which is part of the 7A loan program. So, okay, so let me recap. All right. You want an SBA loan that is the best place to go for financing. I believe in 2024, you’re going to, you’re not going to save that much on interest at all. But you will have much more of a higher chance of getting that loan because the SBA will guarantee that loan to its network of lenders. So go to sba.gov and you will find out who those lenders are in your area and you can talk with them about options.

Gene (08:54):

There are two types of loans I think you should be looking at. There are other loan programs by the way, but the two most popular ones are the 7 A program and the 504 loan program. Both of them. The 7A program, you can borrow around 5 million. The 504 program, you can borrow 5.5 million. The 7A program can be used for a bunch of different things from working capital to buying somebody else’s business. The 504 loan program is more designed for capital improvements, machine, equipment, property, those kinds of things. You also have the ability to negotiate fixed or variable rates of interest on these loans. And the terms for payback also will vary depending on what you negotiate with your banker. You do need to expect to provide documentation, history, tax returns, all the things you would normally do in that loan process because nobody wants you to default.

Gene (09:50):

So due diligence will happen. But I’m telling you, SBA loans are the place to go in 2024. My name is Gene Marks. You have been listening to the Hartford Small Biz Ahead podcast. Thanks so much for joining me. If you’d like any tips or help to run your business, please visit us at smallbizahead.com. You can get lots of great helpful articles, some that I write, some that other smart people write, as well as back episodes of this podcast. Thanks again for listening. We’ll be back to you next week with some advice to help you run your business. Take care.

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