Welcome to Elite Business Consultants- Understanding SBA Loans-
SBA loans are loans to small businesses for everything from start-up, to expansion, to purchase of equipment, working capital and even purchasing or constructing a building for your business. There are 2 main types of SBA loans…the 7A loan and the 504 loan. SBA loans are GREAT loans for businesses as the amortization and interest rate and repayment terms tend to be the best that a business will get. There are differences between the two programs, which I will go over below but generally speaking, if you need financing and you can qualify for an SBA loan, it is worth it. The paperwork is not that much more than a conventional bank loan and the low down payments allow you to keep precious cash on hand. Here is the low down:
7A Loan- The 7A loan is the most common SBA loan and it is the easiest to qualify for. The 7A loan program can be used for franchise start up financing, purchase of equipment, working capital, debt consolidation, partner buy out and more. Rates tend to be adjustable tied to prime, but stay at or below 7% with 10 year to 25 year amortization depending on whether real estate is involved or not. Generally you need above a 620 credit score, no bankruptcies or foreclosures in the last 4 years and the business needs to support the debt. You CAN use projections based on getting the capital which is what allows this loan to be used for start up franchise money as well. These loans are also available EVEN if NO collateral is available. Let’s say you are doing a franchise start up loan, you can get the franchise fee, working capital, equipment, buildout of the leased space, furniture,fixtures and more ALL put into the loan. You come up with 20% of that amount, the SBA 7A loan can be for the other 80%. When dealing with an existing business, expansion,etc. the amount down can be as little as 10% down. For doctors, 100% financing is available. Compare this to a conventional loan where the qualifications are much tougher and the amount down will typically be 25-35% or more. That extra down-payment required for conventional can be a big drain on cash on hand. Most 7A loans can have working capital built in so you actually get a portion of your downpayment “back” in a sense with the working capital money.
504 Loan- generally needs to be tied to real estate. You can work in renovation money and even equipment but this loan CAN NOT be used for working capital, franchise fees and other “soft” costs. THE ADVANTAGE OF THIS LOAN IS LOW FIXED RATES. This loan is actually a 50% first mortgage and a 40% second mortgage provided by the SBA. That second mortgage rate is a 20 year fixed in the 4’s. When you take it with the first in the low 5’s on a 5 year fixed, 25 year amortization, you are looking at a blended rate that is often in the low 5’s FIXED. Qualifications for this loan are tougher than the 7A loan…generally 650 score and above, cash flow needs to be very solid and consistent in prior years and they like to see liquidity and net worth outside of the proposed building. But solid businesses looking to buy a building or buy the land and build the building will find this loan product VERY attractive.