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What are SBA Loans?

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Small business owners in need of capital often turn to the government for an SBA loan. SBA stands for Small Business Administration. The U.S. Small Business Administration offers a variety of loan programs  designed to meet key financing needs.

The SBA does not lend small businesses money directly. Instead, it sets guidelines for loans that are made by its partners, which include lenders, community development organizations and microlending institutions. In addition, the SBA guarantees that the loan will be repaid, which eliminates any risk for the lender.

SBA loans are not available to small businesses that have access to other reasonably termed financing.

The SBA offers a variety of loan options, each for different purposes, including:

  • 7(a) Loan Program: The SBA's primary program to help startups and existing small businesses obtain financing. 7(a) loans are the most basic and most commonly used type of loans, as well as the most flexible. The money can be used for a variety of general business purposes, including working capital, machinery and equipment, furniture and fixtures, purchasing or renovating land and buildings, leasehold improvements and debt refinancing. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. Borrowers can apply through a participating lender institution.
  • Microloan Program: Offers very small loans to startups, newly established or growing small business concerns. The loans can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans up to $50,000, with the average loan being about $13,000. The loan cannot be used to pay existing debts or purchase real estate.
  • CDC/504 Loan Program: Provides businesses with long-term fixed-rate financing for major assets, such as land and buildings. The loans are typically structured with the SBA providing 40 percent of the total project costs, a participating lender covering up to 50 percent and the borrower putting up the remaining 10 percent. Funds from a 504 Loan can be used to purchase existing buildings or land or long-term machinery, construct or renovate facilities, or refinance debt in connection with an expansion of the business. These loans cannot be used for working capital or inventory. Under the 504 program, a business qualifies if it has a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for the preceding two years before application. The maximum amount of a 504 Loan is $5 million.

When applying for a SBA loan, small business owners are required to fill out forms and documents for the specific loans they are trying to get. In addition, the SBA encourages borrowers to gather some basic information that all lenders will ask for, regardless of the loan type. Among the required items are:

  • Personal background and financial statements
  • Business financial statements
  • Profit and loss statement
  • Projected financial statements
  • Ownership and affiliations
  • Business certificate/license
  • Loan application history
  • Income tax returns
  • Résumés
  • Business overview and history
  • Business lease

The SBA also advises small business applying for a loan to be prepared to answer several questions, including:

  • Why are you applying for this loan?
  • How will the loan proceeds be used?
  • What assets need to be purchased, and who are your suppliers?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team?

Small business owners can find SBA loan applications on the SBA website.

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