Whether building or expanding, many small business owners often work with their bankers to pursue financing from the Small Business Administration (SBA). The SBA has various loan options that offer many benefits to both the borrower and lender.

SBA 504 Loan

One of the most popular SBA loans is the 504, a program used to finance fixed assets like commercial real estate and industrial equipment. The most attractive benefit of the SBA 504 loan is that this particular loan type requires as low as 10% equity down, compared to 25% or 30% typically required for conventional financing, allowing the borrower to preserve capital for other business needs.

There are a number of criteria that must be met in order to secure SBA 504 financing, including what type of business you have. Visit SBA’s website to see all the guidelines. If your business meets their criteria, there are still a few restrictions regarding the loan proceeds usage. For example, a 504 loan cannot be used by a business to purchase inventory or to infuse general working capital. Here are a few more guidelines set by the SBA for a 504 loan:

  • Established businesses must have a tangible net worth of less than $15 million, and an average net income of less than $5 million after taxes for the preceding two years.
  • The SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part, or all, of the requested loan proceeds. If the money is to be used to build a facility, the borrower (or borrower- controlled LLC) must immediately occupy at least 60% of the building.
  • Both established and startup organizations must demonstrate the ability to repay the loan based on historical or projected operating cash flow of the business. Startups must go further to show evidence of relevant management experience and a sound business plan that indicates growth potential.

SBA 7(a) Loan

The 7(a) is available to both startups and established businesses for a variety of uses, including the acquisition of another business, working capital, FF&E (furniture, fixtures, and equipment) and refinancing. A 7(a) loan provides terms that may be better suited to the current needs of the business and may be recommended when the borrower does not meet conventional lending terms. 

As with the 504 program, both existing and start-up businesses must demonstrate the ability to repay the loan based on historical and/or projected cash flow of the business, and start-ups must have a business plan.

The maximum loan amount for this program is $5 million, but many 7(a) loans are much smaller. Interest rates are established by negotiations between the applicant and the lender, with both fixed and variable rate options available. Rates for the SBA 7(a) are based upon the risk profile of the client and would have a shorter lock-in period than a 504 loan.

SBA 7(a) Express Loan

The SBA offers a streamlined version of the 7a known as the SBA Express Loan that may be either a term note or a line of credit. Banks may recommend a 7a Express revolving line of credit for working capital needs when the borrower does not have adequate collateral. The current loan limit of the SBA Express program is $1,000,000 through 9/30/2021, and permanently changes to $500,000 effective 10/01/2021.

SBA CAPLines Program

This program helps small businesses meet short-term working capital needs with a standard asset-based line of credit. This is generally used by businesses to support their working capital needs, using accounts receivable and inventory as collateral. These facilities typically finance growth with principal repaid as the borrower converts short-term assets into cash. A CAPLine requires regular servicing because of the nature of the collateral, and the extra monitoring may.

Where to Start

SBA loan programs provide a great way to meet borrowers needs when financing might not be available under conventional bank lending terms.  

The most appropriate SBA loan for your small business will depend both on your needs and on the health and potential of your company. A healthy cash flow, your collateral, the size of your down payment, and the size of the project all factor into identifying which loan type will best suit you, today and in the future. 

If you want to learn more about the SBA loan options for your business, one of our bankers would be happy to assist.

Also, watch for our upcoming blog series that features ICB customers and how they’ve successfully used SBA loans to finance their business growth! 

Sharon Slager, AVP - Governmental Guarantee Lending

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