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Many individuals believe the Small Business Administration (SBA) loans money to small businesses. In truth, the SBA does not lend money to companies directly.

Banks provide money to companies, and the SBA makes it easier for banks to lend money to small businesses by providing a loan guarantee.

When a person buys a property with less than a 20% down payment, the bank requires the buyer to acquire private mortgage insurance (PMI). The SBA will contribute the spread to make the bank whole if the buyer defaults on the loan and the bank is unable to reclaim its principal when the property is sold.

The SBA is basically private mortgage insurance for businesses.

Because banks are the only direct lenders to small companies, they must be confident in the company’s capacity to repay the loan. With all of its power, the government is unable to compel banks to make loans that they do not believe are wise.

When it comes to new projects, banks are particularly hesitant to offer credit. Banks utilize a number of factors to assess whether or not to issue a loan to a company.

One of the most important factors is whether or not the company has enough cash flow to pay off the debt’s principle and interest. Because new businesses do not yet have cash flow, banks are unable to grant loans unless the loan is for an asset and there are sufficient other unencumbered assets that may be pledged as security.

In general, the SBA only becomes involved in the small business sector once the company has established its business strategy and is generating cash flow that contributes to profitability. This is why I believe that debt in the form of a bank loan is best used to grow a successful firm rather than for startups.

The three main loan programs supported by the SBA are listed below.

7(a) loans from the small business administration

The SBA’s most popular lending program, the 7(a) Loan Program, provides financial assistance to small companies with unique needs. When buying real estate as part of a company, this is the greatest choice, although it may also be used for:

  • Working capital, both short and long-term
  • Refinance your company’s present debt
  • Furniture, fixtures, and supplies need all be purchased.

A 7(a) loan has a maximum lending amount of $5 million. What the firm does to earn money, its credit history, and where it operates are all important qualifying considerations.

Your lender will assist you in determining which sort of loan is most suited to your requirements.

Businesses must meet the following criteria to be eligible for SBA 7(a) loan assistance:

  • Profitable operations
  • Be classified as a small company by the Small Business Administration (SBA).
  • Be doing business in the United States or its possessions, or plan to do so.
  • Have a fair amount of money in the bank
  • Before requesting financial aid, consider other financial options, such as personal assets.
  • Be able to show that you require a loan.
  • Use the money towards a good business venture.
  • You must not be in arrears on any existing debts to the US government.

The 7(a) loan may be used for a variety of purposes

  • Working capital, both long and short-term
  • The value of existing inventories and receivables is used to create revolving finances.
  • Equipment, machinery, furniture, fixtures, supplies, or materials are purchased.
  • The acquisition of real estate, such as land and buildings.
  • The construction of a new structure or the refurbishment of an old structure
  • Creating a new company or aiding with the purchase, management, or development of an existing one
  • The majority of 7(a) term loans are repaid in monthly principle and interest installments.
  • Fixed-rate loans have the same payments since the interest rate is fixed. When the interest rate on a variable rate loan changes, the lender may need a new payment amount.

The Small Business Administration’s 7(a) program may provide up to:

  • A loan of up to $150,000 will be repaid in 85 percent of the time.
  • A loan of more than $150,000 requires a 75 percent down payment.
  • Loans for the Purchase of Early-Stage Investors

One of the most important benefits that the SBA provides to the small company sector, in my opinion, is the option to buy out a minority partner who wants out of a successful firm via the 7(a) loan program.

Reaching out to a high-income earner, such as a doctor or lawyer, and encouraging them to participate in their new enterprise just to claim the losses on their income taxes is one of the early-stage fundraising ideas that I discuss with many customers who have an LLC and require capital.

With an LLC, you may utilize the operating agreement to provide this investor 100% of the loss, which they can use to offset taxable income from other sources like their high-income wage. Any amount of decision-making engagement the investor may have, if any, as well as the intended exit path, might be specified in the operating agreement.

After the firm has grown and its value has increased, the founder may utilize the SBA 7(a) loan program to purchase the high-income investor at the new and higher valuation.

If each of the following requirements are satisfied, the SBA 7(a) loan program gives 100 percent financing (no down payment).

The purchasing shareholder, usually the founder, has been with the company for at least two years and owns an equivalent or larger stake of the company than the outgoing shareholder.

On the most recent interim and fiscal year-end balance sheets, the firm was not leveraged more than 9 times prior to acquisition.

504 loans from the small business administration

The CDC/504 Loan Program offers up to $5 million in long-term, fixed-rate financing for important fixed assets that help businesses develop and create jobs.

Certified Development Companies (CDCs), SBA’s community-based partners that oversee non-profits and encourage economic development in their areas, provide the SBA 504 loan. The SBA certifies and regulates CDCs.

To be eligible for an SBA 504 loan, your company must meet the following criteria:

  • In the United States or its possessions, operate as a for-profit corporation.
  • Have a net worth of less than $15 million in cash
  • For the two years before to your application, have an average net income of less than $5 million after federal income taxes.
  • Other basic eligibility requirements include meeting SBA size restrictions, possessing competent managerial knowledge, having a viable business plan, having excellent character, and the capacity to repay the loan.

Businesses engaged in nonprofit, passive, or speculative operations are not eligible for loans. Small companies and lenders should contact a Certified Development Company in their region for further information on qualifying criteria and loan application procedures.

An SBA 504 loan may be used to fund a variety of assets that help businesses develop and create jobs. Among them are the acquisition or building of:

  • Existing structures or land
  • The addition of new facilities
  • Machines and equipment that will last a long time

Alternatively, the enhancement or modernisation of:

  • Land, roadways, utilities, parking spaces, and landscaping are all part of the project.
  • Existing infrastructure

The following items are not eligible for an SBA 504 loan:

  • Inventory or working capital
  • Debt consolidation, repayment, or refinancing
  • Investing in rental real estate or speculating on it

The following are some of the maturity periods possible for an SBA 504 loan:

  • SBA Microloans for 10 years, 20 years, and 25 years

Small enterprises and some not-for-profit childcare facilities may get loans up to $50,000 under the SBA microloan program. A typical microloan is about $13,000.

The Small Business Administration (SBA) gives financing to specially authorized intermediate lenders, which are nonprofit community-based organizations with lending, management, and technical support expertise. The Microloan program is administered by these intermediaries for qualifying borrowers.

Each intermediate lender has its own credit and lending criteria. Intermediaries often need some kind of collateral as well as the company owner’s personal guarantee.

The SBA Microloan may be used for a number of things to help small companies grow. Use them when your small company need less than $50,000 to rebuild, reopen, repair, upgrade, or improve.

Here are several examples:

  • Working capital is a term used to describe the amount
  • Inventory/supplies
  • Furniture/fixtures
  • Machinery/equipment

The money you get from an SBA microloan can’t be used to pay off debts or buy a house.

An SBA microloan has a maximum payback duration of six years.

Assistance with disaster loans

For physical and economic damage caused by a declared catastrophe, the SBA also offers low-interest, long-term loans. The SBA offers four different forms of catastrophe financial assistance.

Loans for residential and personal property

Even if you do not own a company, you may be eligible for financial help from the SBA if you live in a designated disaster region and have suffered damage to your house or personal property. You may apply for a loan from the SBA as a homeowner, tenant, or owner of personal property to help you recover after a catastrophe like a fire or flood.

Physical disaster loans for businesses

If you live in a designated disaster region and your company has been damaged, you may be eligible for SBA financial help. Small businesses and most private charity groups may qualify for a loan from the SBA to help them recover after a catastrophe.

The Small Business Administration (SBA) provides physical catastrophe loans up to $2 million to qualifying enterprises and most private nonprofit organizations. The funds from this loan may be used to repair or replace the following items:

  • Fixtures and equipment for real estate
  • Improvements to the leasehold inventory

The Small Business Administration’s Business Physical Catastrophe Loan covers disaster damages that aren’t completely covered by insurance. You may include that amount in your catastrophe loan application if you need to put insurance funds to an outstanding mortgage on the destroyed property.

You may be eligible for a 20 percent loan amount increase above the real estate loss if you implement changes that assist lessen the risk of future property damage caused by a similar catastrophe, as certified by the SBA.

Except as required by construction rules, you may not utilize the catastrophe loan to renovate or expand a firm.

Disaster loans for economic injuries

If you are a small company, small agricultural cooperative, or private nonprofit organization that has incurred significant economic damage and is situated in a designated disaster region, you may be eligible for an SBA Economic Injury Disaster Loan (EIDL):

Amounts and purposes of loans

The term “substantial economic injury” refers to a company’s inability to satisfy its commitments and pay its regular and essential operational costs. EIDLs offer small companies with the required operating capital to enable them survive until regular operations can restart after a calamity.

The Small Business Administration (SBA) may give up to $2 million to assist fulfill financial commitments and operational expenditures that would have been paid if the catastrophe hadn’t happened. Regardless of whether your business incurred any physical damage, the size of your loan will be determined by your real economic damages and your company’s financial requirements.

Economic injury loans for military reservists

Because an essential employee was called up to active duty in his or her role as a military reservist, the Military Reservist Economic Injury Disaster Loan (MREIDL) provides funds to help an eligible small business meet its ordinary and necessary operating expenses that it could have met but couldn’t because an essential employee was called up to active duty in his or her role as a military reservist.

The maximum loan amount under the MREIDL is $2 million. Each loan is restricted to the amount of genuine economic harm as determined by the SBA. Business interruption insurance and if the company and/or its owners have adequate finances to run also restrict the amount.

The SBA has the discretion to waive the $2 million statutory limit if a company is a big employer.

MREIDL loans are not intended to replace lost income or profits. MREIDL funds cannot be utilized to replace traditional commercial financing, refinance long-term debt, or develop a firm.

How can you utilize an SBA program to expand your business, buy out one of your early-stage investors, or recover from a disaster?

Thanks to Steven Imke at The Guardian whose reporting provided the original basis for this story.