When it comes to SBA financing, knowing the right loan product to request can be confusing. The good news is a quality SBA lender can guide you to the right one based on your needs. I will share here some of the most common SBA loan types to help you be more prepared when you make that loan request.
The 7a program is the flagship for SBA that started in 1953. This program can be used for a wide variety of loan purposes including business acquisitions, equipment purchases, owner occupied commercial real estate and working capital, just to name a few. They offer a term up to 10 years and cannot have balloon payments. The interest rate will vary, but a lender is capped on how much they can charge as well as the fee for providing access to the program. There will be closing costs that include a guaranty fee paid to SBA. The good news is the lender can develop an overall project cost that includes all of the costs for doing the loan. When it comes to determining how much equity you must provide as a borrower, using a total project cost is very beneficial. Loans can be for amounts up to $5 million typically.
Express loans are essentially a subset of the 7a program that was developed to streamline the process for smaller SBA loans and this program has a limit of $500,000. The purposes allowed for Express loans mirror that of general 7a loans, but this program can also allow for lines of credit to assist a business needing short-term working capital. Lenders are provided with a lower guaranty than with the 7a program, but they also have some additional flexibility versus a 7a loan when it comes to underwriting and loan documentation. However, this does not substitute for following prudent lending practices. Rates and terms of this program also mirror 7a.
This program is unique in that it provides financing for owner occupied commercial real estate or heavy equipment purchases. Instead of offering the bank a guaranty on the loan, the SBA actually funds a portion of the overall project directly. The normal split when funding is complete will be a 50% portion in direct lender financing under conventional rates and terms, a 40% portion funded by SBA and 10% in borrower equity. These percentages can change if the business is a start-up or the property is special use. The 504 program can fund up to $5 million like the 7a program and the rates on the SBA portion are fixed for the term of the loan at rates below the general market. When 504 is involved, a Community Development Corporation (CDC) will partner with the lender and borrower.
These programs can all work in conjunction with one another within the $5 million overall limit. Your lender will guide you through the process to help qualify the opportunity and explain the process. I highly recommend choosing a lender who holds a Preferred Lender status with SBA and has experience. SBA loans do take time and have more paperwork than a standard commercial loan, so having the right partner can make the process smoother and help you reach the end goal.
Community First Bank of Indiana is a Preferred Lender (PLP) of the US Small Business Administration (SBA).
