The Small Business Administration (SBA) is an extension of the US government whose main purpose is to assist entrepreneurs like yourself through various programs. The most appealing and well known program of the SBA is its loan program, designed to help you raise capital for your small business once you present them with your business plan.
The unique thing about SBA loans is that they are government backed loans that banks or other lenders offer to small business. In doing so, the SBA takes the risk away from lenders and gives entrepreneurs access to loans at competitive interest rates. In fact, many loans offered through the SBA restrict large businesses, businesses with a lengthy operating history, or non profit businesses from applying.
The key loans offered are the 7a, CDC/504, Micro, and specialty loans.
7a Term Loans
The 7a Term Loan is the most common type of loan backed by the SBA. They are typically issued with restrictions to its use, such as for working capital or to refinance debt. The SBA secures between 75% and 85% of the loan for the lender, which results in an interest rate that is just slightly above the prime rate due to its government backing.
You can apply for principals up to $2 million on a 7a loan, with terms ranging from 7 to 25 years.
CDC/504 Term Loans
Certified Development Company Loans (CDC) are ideally used for purchases or improvements to fixed assets. The principal range on CDCs is from $1.5 million to $4 million. Unlike 7a loans, CDC’s are only 40% backed by the SBA, and an additional 10% comes from you, the borrower, in the form of collateral.
The interest rates on these types of loans are tied very closely to 5 and 10 year U.S. Treasury Rates, with only a slight premium. In addition, there’s a 3% fee attached to the loan, which most borrowers pay directly from the capital raised.
The SBA takes a different approach with microloans than it does with its other popular loans. With microloans, the SBA does not back a lender in case of default. Instead, the SBA provides money to non-profit organizations who lend to small businesses at their own discretion. As a result, the requirements for these loans vary greatly.
The only overall restriction on microloans is a maximum principal of $35,000 with a term of 6 years. Rates are generally observed between 8% and 13% and an average loan size of $13,000.
The SBA also offers many specialized loans that certain businesses can take advantage of. They have a wide variety of uses and restrictions and require unique qualifications in order to be issued.
Some of these specialty loans include: disaster recovery loans, export express loans, international trade loans and the new ARC loan.
For example, the American Recovery Capital loan (ARC) was recently created in order to help previously profitable businesses that are currently in distress. The maximum principal on these loans is $35,000, given to you over a period of 6 months. The loan’s interest rates are extremely low at 2%, it is 100% backed by the government, and you are not required to make any payments for 12 months.
As with most governmental agencies however, there is a large amount of paperwork that is required for SBA loans, especially when compared to traditional loans. Furthermore, you will have to prove your current situation matches the restriction on the loans set forth by the SBA.
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