Looking for financing in 2015? Business owners stand perfectly poised for financing in today’s economy.
by Tom Garceau, SBA Lending Regional Sales Manager, Wells Fargo
As the economy continues to improve in 2015, it’s a great time for small business owners who are looking to expand and grow their operations to work with a banker and explore all their financing options. For many small businesses that need funds for a real estate purchase and expansion, or to acquire another business and manage cash flow, the SBA 7(a) term loan is a great option to consider. So what’s an SBA 7(a) loan and what type of business should consider pursuing this financing? Here are a few quick facts on SBA 7(a) loans.
Why the SBA 7(a) Program?
The U.S. Small Business Administration (SBA), which does not directly make loans, provides a guarantee for SBA loans made to small businesses by banks and other lending institutions. Because the SBA guarantees a portion of the 7(a) loan, SBA lenders are able to offer an alternative to creditworthy business owners who may not be able to obtain conventional bank financing.
SBA 7(a) Loan Eligibility
To be eligible for the 7(a) loan program, a business must operate for profit, and qualify as a small business, as defined by the SBA. Also, businesses cannot have a tangible net worth that exceeds $15 million and an average net income of greater than $5 million over the past two years. For more information on eligibility, the U.S. SBA has identified specific businesses that are not eligible for 7(a) loans.
Basic Uses
If you apply and are awarded a 7(a) loan, you can use the loan proceeds to help finance a large variety of business purposes. Typical uses of a 7(a) loan, which have maximum amount of $5 million, include the following:
- To purchase equipment, machinery, furniture, fixtures, supplies or materials
- To purchase real estate, including land and buildings
- To construct a new building or renovate an existing building
- To establish a new business or assist in the acquisition, operation or expansion of an existing business
- To refinance existing business debt, under certain conditions
Advantages
The 7(a) loan offers flexibility, such as longer terms, and lower down payments, compared with other types of business financing. With longer terms, business owners typically have lower payments and are able to retain working capital and maximize cash flow to grow their businesses.
Fees and Interest Rates
Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. As a way to encourage more small loans, the SBA is waiving fees for loans less than $150,000. Interest rates on 7(a) loans are typically negotiated between the borrower and the lender and subject to SBA maximums. Both fixed and variable interest rate structures are available.
Terms
SBA loan programs are generally intended to encourage longer-term small business financing. Loan terms are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan terms have been established: 25 years for real estate; 10 years for equipment (or demonstrated useful life); and 10 years for working capital or inventory loans.
Most lenders will also ask for a comprehensive business plan that clearly states the goals and objectives for the business, as well as information about your experience and management capabilities. Use this checklist to ensure you have all the necessary documents for your application.
