President Eisenhower signed the Small Business Act on July 30, 1953, to create the United States Small Business Administration (SBA), although its roots date to the 1930s. While the House of Representatives tried unsuccessfully to eliminate the agency in 1996 and it faced other efforts to trim its funding, The American Recovery and Reinvestment Act of 2009 strengthened the agency.
Today it continues its mission, to “maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.”
That mission includes offering a variety of loans specifically tailored to meet the unique needs of small business owners.
Why Choose an SBA Loan Over a Traditional Line of Credit (LOC)?
Startups or companies with fewer than two years of trading history often struggle to qualify for a traditional line of credit (LOC), which many larger businesses like franchise restaurants use to maintain cash flow. Because purchase orders don’t count as collateral, companies may find this restriction too prohibitive if they want to grow. LOCs may cost less to borrow than an SBA loan, but they also lack the flexibility that growing small businesses require.
The government guarantees SBA loans, which were designed specifically to foster expansion and growth. The loan programs provide business owners with ready funds to use for working capital and business expansion. In fact, an SBA loan allows a business owner to fold in other costs for which they don’t want to drain their capital budgets, like:
- Real estate purchases
- Construction or renovation costs
- Moving expenses
- Equipment upgrades
- Expanding personnel needs
- Long-term working capital (A/P, inventory purchasing, operational expenses)
- Short-term working capital (seasonal financing, construction financing, contract performance)
- Establishing or acquiring a new business or expanding an existing business
- Refinancing existing debt
Who Might Benefit from an SBA Loan?
Many companies and industries don’t qualify for a general bank LOC because of their type of business, status as a startup, or low-projected repayment ability. It’s hard to qualify for a LOC without showing proof of solid earnings or current assts like receivables and inventory. SBA loans provide another option.
Imagine if you’re a business owner in the manufacturing or distribution sector. You’ll likely have added costs that could tie up working capital, especially if you don’t have the right loan structure. You may need to use more of that working capital on financials to pay for costs or an existing LOC to cover other business expenses — like buying inventory. If you’re forced to spend your LOC on unqualified items, you could run into issues.
Types of SBA Loans
Companies who want to apply for an SBA loan submit an application to their lending institution which, in turn, applies to the SBA for a loan guarantee. The SBA also requires all business owners with a minimum 20% ownership stake to provide an unconditional personal guarantee. The guarantee holds owners accountable for making payments should the business fail to make them.
The SBA intended for small businesses to use loans like the 7(a) loan to fund working capital, expansion, and equipment purchases. These loans include:
7(a) Loans
Standard 7(a) and Small 7(a) Loans
The SBA’s 7(a) loan provides financial assistance to small businesses, including those who may want to buy and/or improve real estate. Businesses can request up to $5 million. The maximum SBA guarantee percentage is 85% for loans up to $150,000 and 75% for loans greater than $150,000. Borrowers can use a revolving line of credit for up to 10 years. Businesses can also apply for a smaller 7(a) loan that offers a maximum loan amount of $350,000. The guarantee for these smaller loans is the same as the standard 7(a) loan.
Express Loans
Express loans, so-named because the program includes an accelerated 36-hour turnaround time for SBA review, allow businesses to borrow up to $350,000. With a maximum SBA guarantee of 50%, the revolving line of credit includes up to seven years, with maturity extensions allowed at the beginning of the loan term.
SBA Loans in the Time of COVID
Many in the financial industry found that people shopped for money – but shopped late. What the COVID-19 epidemic shows is that it does matter who your lender is. Terms and loan types are important. Smaller private banks have been better equipped to help their clients. When small business owners approached their banks, banks offered Economic Injury Disaster Loans (EIDL) through the SBA.
CREA United member Matt Putnam, an SBA Specialist at Dogwood State Bank SBL, says his bank pivoted easily to execute best practices that included creating dedicated emails, setting up processes, and providing information to their clients so that they had the information they needed when they navigated through the SBA website to apply for a loan.
Putnam says, “SBA financing has always been looked at as secondary financing because interest rates are a bit higher. But traditional loan lenders also have a more secure position and a secondary form of repayment because [they] can liquidate property. With an SBA loan, lenders have more skin in the game, so our risk is higher.
“All my clients who closed on 7(a) loans benefitted from six months of the government making payments. How nice would it have been if traditional loans offered the same terms? Even our clients who chose not to defer are still benefitting because the SBA loan structure has more flexibility than a traditional loan,” he says.
