SBA Loan

Applying for an SBA Loan for your Small Business

When you are ready to start or expand your business, and want to see whether an SBA loan program might be appropriate for you, here’s how you go about getting started applying for a loan:

Documentation requirements may vary; contact your lender for information you must supply. Common requirements include: purpose of the loan, history of the business, financial statements for three years (existing businesses), schedule of term debts (existing businesses), aging of accounts receivable and payable (existing businesses), projected opening-day balance sheet (new businesses), lease details, amount of investment in the business by the owner(s), projections of income, expenses and cash flow, signed personal financial statements and personal resume(s). You should take the information, including your loan proposal and submit it to a local lender. If the lender is unable to approve your loan, you may ask if the lender can consider your request under the SBA loan guaranty program. Under this program, the SBA can guaranty up to 85% of a small business loan; however, the lender must agree to loaning the money with the SBA guarantee. The lender will then forward your loan application and a credit analysis to the nearest SBA District Office. After receiving all documentation, the SBA analyzes the entire application, then makes its decision.

The process may take up to 10 days to complete. If the lender needs SBA applications and/or guidance it may contact the nearest SBA District Office by visiting http://www.sba.gov/localresources/index.html. Upon SBA approval, the lending institution closes the loan and disburses the funds. To be eligible, a business must be operated for profit and not exceed SBA’s size standards. For further information and eligibility requirements, visit Contracting Opportunities.

What counts as a Small Business for and SBA Loan

Did you ever wonder what counts as a small business? Well its really pretty simple. It has to be a business, and it has to be small. Here is how the SBA defines it:

A Small Business is one that:

1. is organized for profit;
2. has a place of business in the United States;
3. makes a significant contribution to the U.S. economy by paying taxes or using American products, materials or labor; and,
4. does not exceed the numerical size standard for its industry.

The business may be a sole proprietorship, partnership, corporation, or any other legal form.

There is an SBA small business size standard for every private sector industry in the U.S. Economy. SBA uses the North American Industry Classification System (NAICS) to identify the industries.

Small Business

Size Standards (usually stated in number of employees or average annual receipts) represent the largest size that a business (including its subsidiaries and affiliates) may be to remain classified as a small business for SBA’s programs and for Federal contracting programs.

SBA has several general Size Standards. A business in one of the following industry groups is small if it is not greater than the size standard indicated.

Industry Group

Size Standard
Manufacturing 500 employees
Wholesale Trade 100 employees
Agriculture $750,000
Retail Trade $6.5 million
General & Heavy Construction (except Dredging) $31 million
Dredging $18.5 million
Special Trade Contractors $13 million
Travel Agencies $3.5 million (commissions & other income)
Business and Personal Services
Except: $6.5 million

Architectural, Engineering, Surveying, and Mapping Services

$4.5 million

Dry Cleaning and Carpet Cleaning Services

$4.5 million

If the size of a business exceeds the size standard for its overall industry group, it may still be a small business for the specific NAICS industry in that group. Some industries have higher size standards than the general one for the industry group. SBA has a Table of Size Standards on its web site.

Don’t know the NAICS code? Search for NAICS industries on the U.S. Bureau of the Census web site.

For Federal contracting, a small business must not exceed the size standard stated in the solicitation. The contracting officer designates the size standard of the procurement by selecting the size standards established for the NAICS industry that best describes the principle purpose of the procurement.

Need more information on size standards? Please read the Small Business Size Regulations or our “Guide to SBA’s Definitions of Size Standards. ”

For further information, you may write or call the Office of Size Standards.

Office of Size Standards
U.S. Small Business Administration
409 3rd St. , SW, Washington, DC 20416

Phone: (202) 205-6618
Fax: (202) 205-6390
E-mail: sizestandards@sba.gov

Fees on an SBA 7a loan

Fees

To offset the costs of the SBA’s loan programs to the taxpayer, the Agency charges lenders a guaranty fee and a servicing fee for each loan approved and disbursed. The amount of the fees are based on the guaranty portion of the loans. The lender may charge the upfront guaranty fee to the borrower after the lender has paid the fee to SBA and has made the first disbursement of the loan. The lender’s annual service fee to SBA cannot be charged to the borrower.

SBA Program Fees

For loans approved on or after December 8, 2004, the following fee structure applies:

• For loans of $150,000 or less, a 2 percent guaranty fee will be charged. Lenders are again permitted to retain 25 percent of the up-front guarantee fee on loans with a gross amount of $150,000 or less.
• For loans more than $150,000 but up to and including $700,000, a 3 percent guaranty fee will be charged.
• For loans greater than $700,000, a 3.5 percent guaranty fee will be charged.
• For loans greater than $1,000,000, an additional .25 percent guaranty fee will be charged for that portion greater than $1,000,000. The portion of $1,000,000 or less would be charged a 3.5 percent guaranty fee. The portion greater than $1,000,000 would be charged at 3.75 percent.

The annual on-going servicing fee for all 7(a) loans approved on or after October 1, 2006 shall be 0.494 percent of the outstanding balance of the guaranteed portion of the loan. The legislation provides for this fee to remain in effect for the term of the loan.

Combination Financing:

Beginning October 1, 2004, Combination Financing will no longer be allowed

Prohibited Fees:

Processing fees, origination fees, application fees, points, brokerage fees, bonus points, and other fees that could be charged to an SBA loan applicant are prohibited. The only time a commitment fee may be charged is for a loan made under the Export Working Capital Loan Program.

What Percentage of My Loan Will the SBA Guarantee

Guaranty Percents

For those applicants that meet the SBA’s credit and eligibility standards, the Agency can guaranty up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000. This standard applies to most variations of the 7(a) Loan Program.

However, SBAExpress loans carry a maximum guaranty of 50 percent guaranty. The Export Working Capital Loan Program carries a maximum of 90 percent guaranty, up to a guaranteed amount of $1,000,000.

SBA Loan Terms - How Long do You Have to Pay Back

Maturity

SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on: the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)

When loan proceeds will be used for a combination of purposes, the maximum maturity can be a weighted average of those maturities, which results in level payments. Or, it can be the sum of equal monthly installments on the allowable maturities for each purpose, which results in unequal payments, with a higher requirement for repayment during the initial term of the loan.

SBA 7(a) Loan Program

7(a) loans are the most basic and most used type loan of SBA’s business loan programs. Its name comes from section 7(a) of the Small Business Act, which authorizes the Agency to provide business loans to American small businesses.

All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate with SBA in the 7(a) program which expands the availability of lenders making loans under SBA guidelines.

7(a) loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA’s requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower.

Under the guaranty concept, commercial lenders make and administer the loans.

The business applies to a lender for their financing. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty which SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for its loss, up to the percentage of SBA’s guaranty. Under this program, the borrower remains obligated for the full amount due.

All 7(a) loans which SBA guaranty must meet 7(a) criteria. The business gets a loan from its lender with a 7(a) structure and the lender gets an SBA guaranty on a portion or percentage of this loan. Hence the primary business loan assistance program available to small business from the SBA is called the 7(a) guaranty loan program.

A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the Government. If the lender is not willing to provide the loan, even if they may be able to get an SBA guaranty, the Agency can not force the lender to change their mind. Neither can SBA make the loan by itself because the Agency does not have any money to lend. Therefore it is paramount that all applicants positively approach the lender for a loan, and that they know the lenders criteria and requirements as well as those of the SBA. In order to obtain positive consideration for an SBA supported loan, the applicant must be both eligible and creditworthy.

What SBA Seeks In A Loan Application:

In order to get a 7(a) loan, the applicant must first be eligible. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner’s equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.

Eligibility Criteria:

All applicants must be eligible to be considered for a 7(a) loan. The eligibility requirements are designed to be as broad as possible in order that this lending program can accommodate the most diverse variety of small business financing needs. All businesses that are considered for financing under SBA’s 7(a) loan program must: meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Certain variations of SBA’s 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

Eligibility factors for all 7(a) loans include: size, type of business, use of proceeds, and the availability of funds from other sources. The following links will provide more detailed information on these eligibility issues.

Size
Eligible And Ineligible Types Of Business
Use Of Proceeds
Availability Of Funds From Other Sources

Character Considerations:

SBA must determine if the principals of each applicant firm have historically shown the willingness and ability to pay their debts and whether they abided by the laws of their community. The Agency must know if there are any factors which impact on these issues. Therefore, a “Statement of Personal History” is obtained from each principal.

Other Aspects Of The Basic 7(a) Loan Program

In addition to credit and eligibility criteria, an applicant should be aware of the general types of terms and conditions they can expect if SBA is involved in the financial assistance. The specific terms of SBA loans are negotiated between an applicant and the participating financial institution, subject to the requirements of SBA. In general, the following provisions apply to all SBA 7(a) loans. However, certain Loan Programs or Lender Programs vary from these standards. These variations are indicated for each program.

SBA Small Business Startup Assessment Test

Are You Ready to Start a Business?

This assessment tool is designed to help you better understand your readiness for starting a small business. It is simple to use and will take less than 5 minutes to complete. The tool will prompt you with questions and assist you in evaluating skills, characteristics and experience – as they relate to your preparedness for starting a business.
Your responses will be scored automatically and an assessment profile provided, when you click the submit button. You will also receive, based on your score, a statement of Suggested Next Steps, directing you to the most appropriate SBA resources to help improve your business preparedness. Such next steps may include free SBA online courses, direct access to online counseling and/or targeted links to appropriate resources.

Socially and Economically Disadvantaged Firms and the SBA

1. What is the difference between 8(a) certification and SDB certification?

The 8(a) program is a business development program that offers a broad scope of assistance to socially and economically disadvantaged firms. SDB certification strictly pertains to benefits in Federal procurement. 8(a) firms automatically qualify for SDB certification.

2. What are SDB program benefits?

1. The program offers several important incentives: price evaluation adjustment: qualified SDBs receive a price evaluation adjustment of up to 10 percent on procurements where mandated by regulation. The price evaluation adjustment for SDBs bidding as primes became effective October 1, 1998. Regulations mandate this approach in competitive acquisitions over the simplified acquisition threshold (usually $100,000) where the SIC Code for the prime contract is authorized by U.S. Department of Commerce benchmarks. The price evaluation adjustment does not apply to 8(a) acquisitions and small business set-asides.
2. evaluation factor: qualified prime contractors can receive a credit when using SDBs as subcontractors. This evaluation factor for SDB participation became effective January 1, 1999. The incentive applies only to competitive negotiated acquisitions over $500,000, or $1,000,000 in construction. The evaluation factor does not apply to small business set asides, 8(a) acquisitions, or contracts performed entirely outside the United States. The evaluation factor for SDB participation allows credit for subcontractors only in the SIC codes authorized by the US Department of Commerce benchmarks and requires that all SDBs be certified by the SBA. Once certified, firms remain on the SBA’s list of SDB-certified firms for a period of three years.

3. How do I apply for SDB certification?

You must fill out an application and send it to:

Office of Small Disadvantaged Business Certification and Eligibility
409 Third Street, S.W. - 8th Floor
Washington, D.C. 20416

There are several different applications for various business legal structures. The SBA notifies applicants within 15 days, if the application is complete. SBA renders its decision within 60 days.

Private Certifiers are no longer available. All applications are being processed by the Office of Small Disadvantaged Business Certification and Eligibility in Washington DC.

4. Checking on the status of your SDB Application?

If you are checking on the status of your SDB application, please send an e-mail to SDB@sba.gov (SDB answer desk). Please allow at least 15 days from the date the application is sent, for the application to be received and assigned. The SDB answer desk will respond identifying which Business Opportunity Specialist (BOS) is working on your case and you may then contact the Business Opportunity Specialist (BOS) directly.

Interest Rates on SBA 7a loans

7a Interest Rates

Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate.

Interest rates may be fixed or variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25 percent if the maturity is less than 7 years, and Prime Plus 2.75 percent if the maturity is 7 years or more.

For loans between $25,000 and $50.000, maximum rates must not exceed Prime Plus 3.25 percent if the maturity is less than 7 years, and Prime Plus 3.75 percent if the maturity is 7 years or more.

For loans of $25,000 or less, the maximum interest rate must not exceed Prime Plus 4.25 percent if the maturity is less than 7 years, and Prime Plus 4.75 percent, if the maturity is 7 years or more.

Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the “Federal Register.” The lender and the borrower negotiate the amount of the spread which will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must be no more often than monthly and must be consistent, (e.g., monthly, quarterly, semiannually, annually or any other defined, consistent period).

SCORE - the SBA’s free business consulting program

Everything you need to know about business, these guys learned while you were in kindergarten. Score is a brotherhood of retired business executives who love working with startup businesses as volunteers to help y ou get your business off of the ground.

1. What is the SCORE Association?

The SCORE Association (Service Corps of Retired Executives) “Counselors to America’s Small Business” is a nonprofit association comprised of 11,500 volunteer business counselors throughout the U.S. and its territories. There are 389 SCORE chapters in urban, suburban and rural communities. SCORE members are trained to serve as counselors advisors and mentors to aspiring entrepreneurs and business owners. These services are offered at no fee, as a community service. SCORE was formed in 1964 and nearly 4.5 million Americans have utilized SCORE services.

2. How can the SCORE Web site help me?

This site offers practical “how to” information to help your run your business. You can also get free and confidential business advice from SCORE with Get Email Counseling. You can Find SCORE in your community to find the location and even a map of the location of your nearest SCORE office.

3. How can SCORE help me in a changing economic environment?

In times of economic change, you must be diligent in preparing advance plans. Begin developing a business plan with realistic sales projections and a plan to hold the line on costs. SCORE can provide advice to help you develop or update your plan. You can Get Email Counseling right now through the SCORE Web Site. SCORE & Visa U.S.A also offer a FREE financial management workbook, How to Secure Financing. This guide can help you build a relationship with a bank, so you can obtain a loan when you apply for a loan.

4. Can I contact SCORE via email?

Yes. This Web site offers a special feature called Get Email Counseling. You can go to email counseling and pose a business question to one of the SCORE business counselors who have joined the SCORE CyberChapter to provide you with email answers to business questions. You choose from a list of counselors with expertise in the business areas that interest you and write a question to the counselor who is the best match for your business or industry.

5. What is email counseling?

Email counseling is an email exchange between you a soon-to-be entrepreneur or small business owner and a volunteer, SCORE business counselor. Email counseling gives you the opportunity to send email questions about small business to a SCORE counselor anywhere in the country. Just Get Email Counseling to get business advice. Send a questions and your SCORE counselor will reply with his or her answer. Keep the dialog going as long as you have questions for your business counselor.

6. What qualifies SCORE members to give business advice?

The key qualification SCORE counselors bring to clients is real-world experience. SCORE business counselors have general management and specific industry experience that can benefit your business. SCORE business counselors may be working or retired business owners, business executives or operations managers. All SCORE counselors receive specialized training in counseling and mentoring.

7. What kind of counseling does SCORE provide?

SCORE’s experienced business experts provide general business advice on everything from how to write a business plan, to cash flow management, to developing a small business advisory board. Assistance for aspiring entrepreneurs may involve investigating the market potential for a product or service and assessing the capital needs to start a business. Counselors can provide insight into how to start a business, operate a business, buy a business or franchise and sell a business.

8. Does SCORE offer other services?

Yes. SCORE offers low-cost workshops and seminars. Workshops and seminars are offered at the local chapter level. Topics are planned to help address specific interests in a given community. Basic workshop fees generally range from $20-$75 depending upon the program. Workshop topics have included: Developing Your Business Plan, Starting and Operating Your Own Business, Getting Financing For Your Business, Basic Business Accounting, Expanding Your Business and Marketing-A Do-It-Yourself Approach for Small Business.

9. How can I contact SCORE for assistance?

You can contact SCORE a number of ways. You can call 1 (800) 634-0245 for a referral to the SCORE chapter nearest you and make an appointment for face-to-face counseling. You can use Find SCORE to locate a chapter near you complete with address, phone number and a map you can print right now. Or you can Get Email Counseling to send an email message to a counselor and begin electronic counseling.