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Obtaining capital is always a major concern for any owner or investor in small businesses and commercial property. Often banks are unwilling to offer the funds needed or will only do so at very high interest rates. This can be a major roadblock for would-be businesses owners and investors who lack significant financial resources. Enter the SBA loan. Created, partially guaranteed, and overseen by the U.S. Federal Government’s Small Business Administration, the SBA loan serves as a way for individuals to obtain necessary capital in amounts ranging from as little as $500 to as much as $5 million or even more in some cases.

It is important to understand that the Small Business Administration does not directly lend out funds via SBA loans. Rather they guarantee and regulate SBA loans. The actual funds come from private lenders who the Small Business Administration partners with, however, because of the government’s influence the risk for providing funds is lessened thus these private lenders feel more comfortable offering loans to small entrepreneurs and investors. 

There are six primary types of SBA Loans. I will cover in more depth the three most relevant to general businesses activities, then lightly touch on the other three at the end. First, there is the SBA 7(a) loan. This is the most common type of SBA loan because they can be used for most business purposes, such as business acquisitions, equipment purchases, debt refinancing, tenant improvements, and other needs of for-profit businesses. Loan amounts for this type can be up to 5 million dollars, with interest rates between 7.5% and 10%. Repayment terms are up to 7 years for working capital and inventory, up to 10 years for business acquisitions and equipment purchases, and 25 years for commercial real estate loans. The minimum requirements for this type are a credit score of 680, you must have no recent foreclosures or bankruptcies, and a down payment of at least 10%. Startups and those with insufficient collateral may have to pay a larger down payment. 

The second type is the CDC/SBA 504 loan. These loans are meant for small businesses seeking to purchase or build commercial real estate. It works by pairing two lenders, one traditional and one a community development corporation. The bank will lend up to 50%, the CDC up to 40%, while the remaining 10% is put up by the borrower. Loan amounts can reach up to 14 to 20 million dollars. Interest rates can vary because you are essentially paying for two different loans, but typically you will be paying a total of 4% to 6% interest. To qualify for this loan type, the borrower must have a credit score of 680, their business must occupy at least 51% of the space, and they must demonstrate both repayment ability and a tangible net worth of less than $15 million.

The third type are SBA CAPlines, which is a program that offers four SBA loans or lines of credit providing up to 5 million dollars in order to help small businesses with short-term and cyclical needs. The requirements and rates for this program are the same as for the SBA 7(a) loans, with the additional caveat that there must be at least a 20% guarantee by the owner. There are four specific loans in this program: the seasonal line, which requires a demonstrated pattern of season activity, the working capital line, which converts short-term assets into cash therefore your business must generate accounts receivable, the contract line, which can be used for purchasing materials and labor for specific contracts and requires demonstrated experience and capability to meet the contract. Finally there is the builder’s line, which is offered to builders and contractors who are constructing or renovating residential or commercial buildings, for this line experience and capability must be demonstrated. 

The final three types of SBA Loans are Export Loans, Microloans, and Disaster loans. These three are less commonly utilized and serve very specific needs. Export loans are made to assist small business with export and international financing activities, Microloans provide business small amounts of capital up to $50,000, and Disaster loans are made to assist companies who have been impacted by natural disasters. 

SBA Loans can be a valuable way for small businesses and private investors to obtain capital to make their aspirations a reality. If reading this overview has sparked your interest you should look at the specifics of the type that sounds like it will meet your needs and consult information relevant to your local area. As with any loan, careful consideration, preparation, and planning must be undertaken before any agreement can be made.


Bray MacIntosh

Financial Analyst Intern

Lee-Chandler Enterprises


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