FranchiseLoan.com

What is the Definition of a SBA Loan?

SBA loans originate from a bank or commercial lending institution but are guaranteed by the SBA to as much as much as 80 percent of the loan principal. This helps reduce the lender’s risk and helps the lender provide financing that’s otherwise unavailable to a franchisee at reasonable terms.

What Types of SBA Loans Are Available?

7(a) General Business Loan Guaranty Program: The SBA’s primary business loan program is the 7(a) General Business Loan Guaranty Program. This SBA loan is generally used for business start-ups and to meet various short and/or long term needs of existing businesses, such as equipment purchase, working capital, leasehold improvements, inventory, or real estate purchase. These loans are generally guaranteed up to $750,000. The guaranty rate is up to 80 percent on loans of $100,000 or less and 75 percent on loans more than $100,000.

SBA guaranteed loan guidelines are similar to standard bank loans. But, in addition, your franchise must qualify as a small business according to SBA standards. These standards will vary from industry to industry.

The interest rate charged on SBA guaranteed loans is based on the US prime rate. The Small Business Administration does not set interest rates, since they are not the lender, but the SBA does regulate the amount of interest that a lender may charge an SBA borrower. In example, If the loan has a term of seven years or more, the SBA allows the lender to charge as much as 2.75 percent above the prevailing prime rate. If the loan has a term of less than seven years, the surcharge can be as much as 2.25 percent.

504 Local Development Company Program: The SBA 504 Loan Program provides long term, fixed rate financing to small businesses to acquire real estate, machinery or equipment. The loans are administered by Certified Development Companies (CDCs) through various commercial lending institutions. SBA 504 loans are typically financed 50 percent by the bank, 40 percent by the CDC and 10 percent by the business.

The CDC is involved because in exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or to meet certain public policy goals.

The SBA Microloan Program: The Small Business Administration’s Microloan Program offers anywhere from a few hundred dollars to $25,000 for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment to businesses that cannot apply to traditional lenders because the amount they need is too small. It is unlikely that many franchise operators will seek this level of money, but it can be an option.

SBIDC Loan Program: State Business and Industrial Development Corporations (SBIDCs) are capitalized through various state governments. SBIDCs offer long term loans (5 to 20 years) for either the expansion or for the purchase of capital equipment.

CDC-504 Loans: CDC-504 loans provide fixed-asset financing through Certified Development Companies (CDCs). The 504 CDC Loan Program is designed to enable small businesses to create and retain jobs. The desired return on investment for a 504 CDC is one job for every $35,000 provided by the SBA.

Community Adjustment and Investment Program Loans: Community Adjustment and Investment Program loans is in response to overseas competition and its aim is to create new, sustainable jobs and preserve existing jobs in at risk businesses.

SBA Energy and Conservation Loans: SBA Energy and Conservation loans are for small businesses engaged in engineering, manufacturing, distributing, marketing, and installing or servicing products or services designed to conserve energy resources.

Export Working Capital Program: The Export Working Capital Program provides short-term loans to small businesses for export-related business.