SBA Loans
Small Business Administration Loans
SBA Loans are an option for Buyers who can meet both local bank and government requirements. The US federal government has stepped in to assist new businesses getting started (or purchasing existing businesses) with the Small Business Administration’s loan program. The SBA Loan may be a viable option for purchasing an existing business. SBA loans are typically made through traditional banks and credit unions which, if they meet the SBA requirements, the repayment of the loan will be partially guaranteed by the Federal government.
With an SBA loan, the government has guaranteed a portion of the loan that the bank is issuing, thus lowering the risk to the bank. SBA loans have many requirements and regulations which often take more time to qualify for, but the payoff is that SBA loans typically require smaller down payments and lower interest rates. The loans may be more cumbersome to qualify for but are excellent loans for the borrower if they can qualify. SBA loans will require the loans be personally guaranteed by all owners owing at least 20% of the business.
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The interest rates charged on SBA loans are generally lower than what can be obtained elsewhere, due to the government’s involvement in the guarantee of the loan. This is an important factor for the new business owner, as a lower interest rate will imply a lower monthly payment and less interest charges over the course of the loan.
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Qualifying for the loan is somewhat easier although the application process can be more difficult due to the myriad of additional SBA rules and regulations. Generally, banks and other lending institutions are less likely to loan a significant amount of capital to individuals without proven track records or substantial assets or other higher risk factors. However, with the SBA guarantee on a large portion of the loan, these same banks will be more flexible if the loan can meet the SBA standards.
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Closing costs and down payments on SBA loans are lower. With less up-front costs to secure the loan, the new business owner has more latitude during the initial ownership phase to expend that capital in a fashion that suits them best. For some SBA loans, the borrower may be able to put down as little as 10% of the loan amount, where banks may require as much as 50%. This can be a significant advantage in the early stage of ownership of a business.
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Loan Terms for SBA loans are generally much longer than for a traditional loan. Depending upon what time of loan you are applying for, the term for SBA loan can be up to 25 years.
Types of SBA Loans
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7(a)
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Most popular
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$5 million max loan
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Can be used to purchase an existing business
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Term of loan is up to 7 years
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504 Loans
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Community based lending program that encourages businesses to grow and create new jobs within the community
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Funding generally used for building and land acquisitions, equipment and machinery purchases and/or improvements on existing buildings
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Term can be up to 25 years
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Eligibility
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Nature of business
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Type of business
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Size of the business
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Business has ability to make loan payments
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Background of applicant meets the requirements set forth by the SBA and Lender, able to meet the credit worthiness requirements
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Applicant has the operational and managerial experience to warrant the loan
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Location of business
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Use of funds must fall within the parameters of lender and the particular SBA loan program
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Sufficient funds for the down payment between 20% and 30%
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SBA Minimum Guidelines
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10% down payment minimum
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Credit score of at least 650
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Useful links
Small Business Administration (SBA) Website
Application Forms:
Borrower Information
https://www.sba.gov/document/sba-form-1919-borrower-information-form
Statement of Person History
https://www.sba.gov/document/sba-form-912-statement-personal-history
Personal Financial Statement
https://www.sba.gov/document/information-notice-5000-813332-sba-form-413-updated-issued