SBA Loans

Loans offered by the Small Business Administration are frequently used for business acquisitions. Through SBA-guaranteed financing, you can purchase a new company or a competitor. For acquisition financing, the SBA requires a minimum of 10% equity to be used for the acquisition. Although this is the case, most SBA-affiliated lenders will need more than 15-20% of equity for business acquisition financing.

Debt consolidation is one of the most common reasons why l businesses utilize SBA loan programs. Companies with short-term debts, like equipment loans or leases, lines of credit, truck loans, merchant cash advances, or other money owed, can refinance and stretch their debt payments over ten years with an SBA loan. By using an SBA Loan for debt consolidation, small businesses are able to dramatically reduce their monthly debt payments. This results in a significantly more cash flow for day-to-day operations and makes managing debt much more manageable for small business owners.

Many businesses require equipment to operate efficiently. However, equipment purchases can be one of a business’s biggest investments. Sometimes, businesses do not have the necessary capital to purchase equipment outright. On the other hand, the financing offered by the SBA gives businesses the money they need to buy heavy machinery and other essential tools. With lower rates, repayments become more manageable for the business.

One barrier that a lot of small business owners experience is limited working capital. Business owners can also turn to the Small Business Administration if they need additional working capital. Traditional bank programs will require term loans to be used for specific purchases or to refinance existing debt. However, the SBA allows small business owners to inject the full loan amount into their bank accounts to fund future operations or immediate working capital needs.

Another purpose of the SBA-guaranteed financing is business expansion. Expansion can help a small business accelerate growth plans. With the financial resources, businesses receive financial assistance to execute their growth plans without worrying about having enough cash flow. By using an SBA loan to expand a small business, the business owner can:

• Acquire additional businesses
• Purchase or update equipment
• Hire more employees for the expansion
• Open new locations
• Purchase commercial real estate
• Create new products

Using an SBA loan to buy out an existing partner is a great way to use long-term financing to own a larger percentage of the company. Many small business owners utilize this financial resource for partner buyouts and gain a stake in their company that they otherwise wouldn’t have been able to afford. Similar to some of the other reasons why small businesses would use an SBA Loan, having a 10-year term to utilize the funds enables some owners to buy out a partner and sustain the payments in addition to the existing cash flow for the business.

The SBA 7(a) Loan Program is the most commonly used program by small businesses. Eligible businesses can receive up to $5 million in funding when approved, and the repayment periods can be as long as 25 years. The SBA 7(a) is as popular as it is because it can be used for various reasons and offers more flexibility than other SBA Programs.

With the funding, businesses can:

• Acquire businesses
• Purchase and improve commercial real estate
• Renovate their stores and offices
• Buy expensive equipment
• Restock inventory
• Refinance debt

Interest rates for SBA 7(a) Loans are among the most competitive in the market. The SBA controls the interest rate the lenders can charge to protect the borrowers. Small business owners can sign up for SBA-backed loans through local banks, credit unions, or other alternative lenders.

The SBA 504 Loan program is unique from other SBA-guaranteed loans in a way that it involves another party, which is the Certified Development Company (CDC). The SBA CDC/504 loan focuses on strengthening a community’s economy through job creation and overall business growth.

With the CDC/504 loan, eligible businesses can get up to $5 million ($5.5 million for manufacturing businesses) in funding. This program is utilized by small business owners looking to invest in fixed assets, including office expansion, new equipment purchase, land development, or ground-up construction projects.

SBA Disaster Loans are part of the SBA Disaster Relief programs, designed to help small businesses that have experienced damage or hardship due to a natural calamity or disaster. It is worth noting that the SBA Disaster Loan is the only SBA loan program wherein the SBA lends money directly to the business owners.

SBA Disaster Loans are classified into five different loan types: Home and Personal Property Loans, Business Physical Loans, Economic Injury Disaster Loans, Military Reservists Economic Injury Loans, and Express Bridge Loan Pilot Program. Each loan is intended to address a specific business purpose.

The SBA also offered COVID-19 relief as part of their disaster loans to help businesses that were heavily impacted by the pandemic. However, the applications for the assistance have ended in 2021.

In general, SBA Disaster Loans can be used for leasehold improvements, repair damage to real estate, or replacing machinery. Businesses can qualify for as much as $2 million in funding when approved.

In order to qualify for an SBA Disaster Loan, the business must have experienced damage during a natural disaster and must be located in a declared disaster area.

The SBA Express Loan is a subset of the SBA 7(a). The difference between the two programs is that Express Loans have an expedited application process. While 7(a) loan take a few weeks to months to get a decision, Express Loans have an average turnaround time of 36 hours.

SBA Express Loans also come with lower loan amounts, considering the loan application process is expedited. Loan amounts can go as much as $350,000, and the repayment length can go as long as 25 years, depending on where the loan was used.

A major benefit of SBA Express loans is that collateral is not a requirement and business owners can use the money for virtually any business purpose. To get approved by the SBA, an applicant must have strong personal credit and cash flow.

The SBA Microloan Program offers funding to SMEs seeking less than $50,000. SBA Microloans can be used for machinery and equipment, furniture or fixtures, working capital, and inventory or supplies. If you want to start your business, you can also use the SBA Microloan for additional working capital.
Through the SBA Microloan program, businesses can borrow from $500 to $50,000 with interest rates ranging from 8% to 13%.

Considered a hard asset, machinery and equipment are favorable assets for SBA lenders. By taking the make, model, year, and the condition of the equipment into consideration, an SBA lender will have the ability to assign a value to the equipment. One of the reasons that machinery and equipment are commonly used by small businesses owners for collateral to secure SBA loans is because these assets are already available and being used by the business.

For most SBA loans, the typical advance rates or loan-to-value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that an SBA lender will provide availability based on what they would be able to sell the equipment for in the event of a default.

A/R, or accounts receivable, is money that is owed to a company after a sale has been made or services have been rendered to their clients. Basically, if a small business provides goods or services to their clients but often wait for the clients to make payments on invoices or for their contracts, the money owed to the small business can be used as collateral to secure an SBA loan.

For most SBA lenders, the A/R that a company has to offer is not as favorable as hard assets, like machinery or equipment. The typical loan-to-value (LTV) for A/R is 20% of the outstanding accounts receivable. This can vary based on the credit quality of the applying business’s clients, the payment terms that are offered, and the diversification of their client base. SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender to provide a revolving line of credit in addition to an SBA Loan.

Although inventory is a tangible asset that might hold value to an operating business, inventory is not always as valuable to an SBA Lender. The type of inventory, the ease of liquidation, and the location of the inventory will all play major roles in determining the advance rate or LTV that an SBA Lender will provide when using inventory to secure an SBA loan. For example, a company that manufactures their own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective, the faster and easier they could sell the inventory, the higher the liquidation value they will assign.

Commercial real estate, or CRE, is a hard asset for small businesses and a great form of collateral for an SBA Loan. Real estate is not as liquid as equipment, A/R, or inventory, but can provide a stable asset for an SBA lender to lend against. Like machinery or equipment, small business owners often utilize real estate to secure SBA-backed loans because the real estate is tied in with the function of the business.
Additionally, unlike asset-based lending, loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. The financing can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan.

Depending on the lender, residential and personal real estate may also be applied as collateral to help secure an SBA loan. However, for traditional loans, many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan and do not accept the residential property.

With SBA lenders, residential real estate can be used as collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make the loans more obtainable for more small business owners. Most homeowners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.

Another type of collateral that can be used to secure an SBA loan for a small business is an investment property. Business owners that invest in various types of investment properties have the ability to pledge those properties as collateral for an SBA Loan, if their lender will accept them. Whether the investment property is a shopping center, office building, apartment building, or single-family home, it might be eligible to be used as collateral.

One final type of collateral that small business owners can use to secure SBA loans are marketable securities. Marketable securities are liquid assets that can quickly be turned to cash. A few examples of marketable securities are publicly traded stocks, private or public bonds, and certificates of deposits (CDs). Like commercial real estate, marketable securities are typically used as ‘boot’ or extra collateral to help a borrower gain additional liquidity. Advance rates for securities tend to range from 50% to 95%, which is dependent on the type of security.