Article by Roger Schlueter
SBA Loans can be very confusing but this may clear things up. The SBA 7a Program was the Original SBA Loan. The SBA 7a Loan is a Guarantee of a Loan Made by a Bank. The SBA Guarantees up to a certain percent of the loan balance as an incentive for the bank to make the loan. This Guarantee is currently 85% on loans of up to $150,000 and 75% of loans Over $150,000. Almost all SBA Loans (Excluding the SBA 504 Loan) are Subsets of the SBA 7a Loan. The SBA 7a Loan is for all types of Business Loans from Real Estate, to Equipment, to Inventory, to Working Capital. The 7a Loan is also a Higher Cost Loan than a Conventional Bank Loan or a SBA 504 Loan. The Main Reason the Loan has a higher cost is the Guarantee fee which is 2% of loans up to $150,000 and 3% or More for loans above $150,000. The 7a Loan also has a 0.05% Fee that the bank has to pay on an ongoing basis.
The SBA 7a Loan was created so that banks could fund loans to small business were there might be a problem area. The Problem Areas are Collateral – not enough, Equity – SBA will allow as little as 10% and can also give credit to Equity already in business, Credit – Banks want excellent Credit but SBA will allow imperfect credit as long as the problems are not Habitual, Industry or Business – Banks are more careful when lending to businesses that have a History of Problems like Restaurants and Leisure Activities.
The SBA 504 Loan was created so that Growing Businesses could assess Long Term Fixed Rate Capital to fund their Growing Business. The SBA 504 Loan can only be used for Fixed Assets like Real Estate or Equipment that has a Useful Life of 10 years or More. The 504 has a minimum Requirement of 10% Cash Equity, (Construction of a Building can use the land as the 10% Equity). Approval Process for the 504 is two fold, they must be approved by a Local CDC (Certified Development Company) which is usually made up of Bankers and then seek the SBA Approval. The SBA 7a on the other hand must only be approved by SBA. Both Loans must be submitted by a Bank or Financial Institution.
All in All the SBA 7a Program is more forgiving than any other SBA Program in Lending to Small Business. The 7a Loan can also be used for Refinancing, Inventory, Vehicles, Any Equipment, Working Capital and Good Will, and of course Real Estate. The Credit Criteria seems to have a lower bar than the SBA 504 Program and the Equity requirement is more Flexible. Small Business Loans that can qualify for the SBA 504 Program sometimes will have an easier time qualifying for the SBA 7a Loan for all the Reasons given above.
Please go through the Blog for Questions or you can asses me directly at roger@rogerschlueter.com
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