Small Business Administration loans

SBA Basic 7(a) Loan

The most commonly used type of Small Business Administration loan is the basic loan, known as an "7(a) Loan". The name refers to the specific section of the Small Business Act, which authorizes the SBA to provide loans to small businesses in the United States.

The Small Business Administration does not actually lend money to small businesses itself. Rather, it provides a program wherein its shares the risk of non-payment with banking and non-banking lenders who choose to participate in the program and agree to structure their loans in accordance with SBA guidelines. Lenders are required to apply to the SBA and be accepted before they may receive a guaranty for a portion of a small business loan. Under this program, it is the lender who makes and administers the loan.

Applying for a basic small business loan

To apply for a 7(a) loan, you must contact a commercial lender who participates in the Small Business Administration program. The majority of the banks in the United States do participate, as well as many non-banking lenders. A lender will review your application and decide whether it thinks it is necessary to apply for an SBA guaranty. Though you will still be obligated to repay the full amount of any loan, the fact that the SBA guaranties a portion of the loan is an incentive for a lender to take a greater risk.

Under the SBA program, if in the process of applying for a 7(a) loan a lender decides not to approve the loan (even though the loan qualifies for an SBA guaranty) the SBA cannot force a lender to lend the money. An applicant should, therefore, be sure they meet SBA and lender requirements before applying for a loan. Similar to a standard loan, an applicant must be eligible and have decent credit.

Are you eligible for a basic small business loan?

When deciding upon eligibility, the SBA and lender will factor in an applicant's business cash flow, character, management skills and collateral, among other considerations. Lenders rely heavily on credit reports provided by Equifax, Trans Union, and Experian, so it is a good idea to purchase a copy of your credit report and look for any errors before applying for a small business loan. You will also want to pay particular attention to your credit score as calculated by these agencies. If your score in not in a desirable range, you may want to try to improve your score before applying for a loan. Take time to learn how to improve your score.

Prequalification Program

In addition to its basic loan program, the SBA works with Small Business Development Centers to offer prequalification certificates. Small Business Development Centers help borrowers put together an attractive loan package and develop a complete business plan. They also take steps to ensure the application meets all requirements and is credit worthy. The Prequalification Loan Program is intended for business owners who are:

• low income
• disabled
• starting a new business
• veterans
• exporters
• in a rural or specialized industry

Once a loan application is complete, if the organization believes the loan will be approved, it will submit the package to the SBA for expedited consideration. This does NOT decrease the SBA's normal processing time.

If after the application has been analyzed the SBA it feels that the loan application has merit, it will issue the borrower a certificate/letter of guaranty that they can then take to a lender. The development center will many times provide the borrower with a list of lenders offering competitive rates.

Non-profit Small Business Development Centers working with the SBA do not charge a fee for loan packaging, however for-profit organizations will charge a fee.

Related resources:

Find a Small Business Development Center by State

SBA Microloan Program

For businesses that are just starting out or trying to grow, an SBA microloan may be the answer. The SBA works with non-profit community based lenders to offer small loans averaging $13,000 and not exceeding $35,000. Applications are made directly to the lender and all decisions regarding the loan are made by the lender as well.

Terms, Interest Rates, and Fees:

Although a microloan must be paid off within six (6) years, terms vary depending on the lender, business plan and the size of the loan. Interest rates, though they vary as well, are usually between 8 - 13%. Most lenders will require some type of collateral as well as a business owner's personal guarantee.

Other small business loan resources:

businessfinance.com
Search the funding criteria of over 4,000 sources for business loans, venture capital, equipment leasing and commercial real estate financing.

smallbusinessloans.com
Assisting business owners obtain small business loans and financing with less than perfect credit

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