SBA Loan Overview

“Most Successful businesses in the country were started on a kitchen table. As long as people have needs unmet or problems unsolved, there are business opportunities.”      – Brian Tracy


Founded in 1953, the Small Business Association, or SBA is a government agency dedicated to helping entrepreneurs and small business owners start, grow and develop their business ventures.

If you plan to start or expand a small business, it’s worth taking a close look at what the SBA has to offer. The SBA has a long track record of helping people in the United States, Puerto Rico, The U.S. Virgin Islands and Guam grow businesses of various types and at differing stages of development. The SBA can assist business owners with anything from writing a business plan, to providing resources and advice for exportation of your products overseas.

One way that the SBA accomplishes its goal of helping small businesses is by guaranteeing certain loans made by lenders to those businesses. While the SBA doesn’t loan money directly, it can help facilitate a loan with a third-party lender such as a bank or credit union, by acting as a guarantor for a certain portion of the loan. In practice, the majority of SBA loans involve real estate, mainly because that gives a hard asset as a guarantee against borrower default.

SBA Loan Programs

The SBA provides guarantees for a variety of loan programs. As will be covered in a later post, the rates and terms of an SBA loan are more favorable to the borrowing entity; also, the qualification requirements are in many ways much more lenient than those of a traditional bank; In fact, in order for a business to qualify for an SBA loan, it must be shown that the project or business entity has already attempted and failed to qualify for a conventional bank loan. Nowadays, of course, that is an increasingly common occurrence.

In the present post-credit-crunch economic environment, banks have become even more cautious as to what kinds of projects and borrowers they will finance. Across America, small companies have borne the brunt of this increased scarcity of business capital. It is commonly held that a majority of applications made by small businesses to banks for loans, lines of credit and other financial products result in rejection. Thus there is no shortage of business candidates that could use assistance from the SBA. Here are some of the most common SBA loan programs:

7(a) Loan guaranty

This is the primary and most widely known SBA loan program. It is flexible enough to be used for purchasing real estate, equipment, expansion, furniture, inventory and/ or working capital. The maximum loan-value the SBA will guarantee is $5 million or 75% of the total loan amount.

Due to SBA policy, lenders are not allowed to charge many of the usual fees associated with commercial loans. The length of the loan can range from 10 years for working capital, to 25 years for real estate. Interest rates vary with the type of loan applied for.

7(m) Microloan program

This program is designed for very small loans, with a maximum available loan amount of $50,000. A 7(m) Microloan can be used for inventory, furniture, machinery, working capital, fixtures, supplies and/ or equipment. These funds cannot be used to purchase real estate, or to service existing debt.

Rather than traditional lenders, Microloans are administered through nonprofit intermediates. These organizations receive funding from the SBA, then provide loans to entrepreneurs.

Interest rates vary, and the loan term can be anywhere up to 6 years.

504 Certified Development Company Loan Program

This loan program provides long-term, fixed-rate loans for the purpose of financing fixed assets, such as real estate or machinery mostly for growth and expansion.

The borrower must put up a minimum of 10%, and a private lender (usually a bank) will fund approximately 50%. The remaining 40% is covered by a so-called CDC, or Certified Development Company. The maximum loan amount is $5 million ($5.5 million for manufacturers and some energy related business). In case of borrower default, the private sector holds first-lien position.

Given the tightened lending standards and reduced availability of small business credit post 2008, a wide variety of companies in today’s economy can benefit from an SBA loan. For example, a business that is currently leasing its premises may want to consider buying, in order to protect against future rent hikes and/ or to start building equity. Alternatively, an SBA loan can be an effective aid to an expansion of a business, or can be used as a way to re-finance existing debt that may have onerous terms, such as a balloon loan for example. Balloon loans, their characteristics, advantages and pitfalls, will be covered in a later post.

The SBA program offers a range of advantages over traditional commercial loans. This article covers only a few of the many available programs. If you think your business could benefit from an SBA loan, contact us on (888) 748-7731 or for more information.


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