By now, many businesses are familiar with the Small Business Administration (SBA) in its role as administrator and guarantor of the Payroll Protection Program (PPP) Loans, as well as, the SBA’s Economic Injury Disaster Loan (EIDL). The PPP was created by the C.A.R.E.S. Act as a new loan program, while the EIDL, which has been around for some time, was expanded to address the national reach of the pandemic.
While the SBA is a critical resource for businesses during times of disaster by providing loans that help businesses stay afloat, the SBA also has two loan programs available to help businesses grow – the SBA 7(a) Loan and the 504 Loan. These loans can be used for working capital, the refinancing of debt, purchasing of equipment and real estate. Note, however, that the SBA does not lend the money directly to the business, but rather the loan is processed through SBA authorized lending institutions. The advantages of these programs are:
- the ability to finance up to 90% of a purchase, with only 10% down payment;
- favorable interest rates, providing lower payments; and
- access to loan amounts usually not available to small businesses through private lending since the SBA guarantees a portion of the loan.
The 7(a) loan is the most common and most flexible of the SBA loans. The maximum amount is $5Mil and it can be used for working capital, refinancing of debt, and the purchase of real estate, equipment, or another business. The term of the loan depends on the use of the proceeds: 7 years for working capital; 10 years for equipment; and 25 years for real estate. The interest rate is fixed and negotiable between you and the lender, but cannot exceed the cap, which varies depending on the prime rate.
The purpose of the 504 Loan Program is business growth and job creation. This loan can be used for the purchase of equipment, machinery and/or real estate, with a maximum loan amount of $20Mil. The repayment term for equipment or machinery is 10 years, while the repayment term for real estate is 25 years. 50% of the funding will come from your lender; 40% from a community development corporation (CDC) and the last 10% is your down payment. The interest rate will be below market and fixed for the term of the loan. Note, if the loan is used for real estate, your business must occupy at least 51% of the commercial building.
Preparing for the Loan
While these SBA loans can provide great benefits for your business, the loan process can be quite long, and you may need to provide more documents then you would for a private loan. If you are seriously considering a 7(a) or 504 loan, here are some of the items you will need to provide and/or provide proof of:
- minimum 2 years of business history;
- Personal credit score of at least 680;
- $100,000 minimum revenue for the past 12 months;
- a Business Plan;
- corporate documents (Articles of Incorporation, Bylaws, corporate resolutions, minutes, Shareholder Agreement, etc.);
- 2 years of personal and business tax returns;
- YTD profit and loss statement; and
- YTD balance sheet and debt schedule.
Please note, anyone who owns more than twenty percent (20%) of the business will need to sign a personal guarantee. Therefore, if anyone in your business is not comfortable with or is not willing to sign such a personal guarantee, perhaps the restructuring of the business may be required.
During this time of recovery, there may be growth opportunities for your business. If your business is ready to expand through the purchase real estate or equipment, or if you wish to buy an additional business, you should discuss these SBA loans with your lender.
Ser & Associates has experience assisting clients through the entire SBA loan process, from restructuring the business, assisting you in preparing the application, to the purchase/closing of real estate and direct interaction with the lender to get you to the finish line/closing. If you would like more information on the SBA loan process, please contact us today at 305.222.7282. And, please be sure to visit us at www.Ser-Associates.com and follow us on Instagram, Facebook, and LinkedIn.