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To SBA or Not to SBA?

by Carolina B. Menendez on Categories: to sba or not to sba?

To SBA or Not to SBA?

With so many options available for individuals and companies to borrow money, it’s often difficult to navigate through all the choices. The SBA (Small Business Administration) is a U.S. government agency that provides support to entrepreneurs and small businesses. SBA loans are offered by traditional banks and lenders but are partially guaranteed by the SBA. Why would a company consider this for its lending needs?

  1. Longer available terms, up to 25 years for real estate and 10 years on any other business asset: With longer amortizations come lower payments, which translates to improved cash flow for one’s business.
  2. Lower equity requirements: One of the advantages of borrowing through the SBA is that one can borrow up to 90 percent of the value of the collateral in some cases. Traditional lending often requires a much larger cash outlay at the onset.
  3. The “Small” in SBA is sometimes a misnomer. At first glance, one may think that because a company or firm earns healthy revenues every year, it may be too large to qualify for SBA assistance. The truth is, the SBA has different size requirements depending on the borrower’s industry and lending need, so it’s always a good idea to check with a banker to confirm eligibility. The maximum dollar amount available through a single SBA loan can be up to $5.5 million, and in the case with 504 loans (described below), one may be able to borrow a larger amount in conjunction with a traditional bank loan.

What types of loans does the SBA offer?

  • Loans to purchase another business
  • Loans to buyout a partner
  • Loans to term out evergreen line balances or to consolidate multiple credit facilities
  • Loans to finance leasehold improvements
  • Loans to purchase equipment
  • Loans to purchase owner occupied real estate

There are several products available depending on the borrower’s individual needs. Below are two examples of SBA loans offered by IBERIABANK.

What is the 7(a) Loan program?

As of 1996, all 7(a) loans are provided by banks and approved lenders who participate in the 7(a) Loan Guaranty Program. These loans are not offered by the SBA directly, but are guaranteed by the SBA, thus reducing the lender’s risk. If the borrower defaults, the lender can look to the SBA for repayment for the portion that they guarantee. To qualify for a 7(a) loan, the company’s tangible net worth must not exceed $15 million and the average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the application date may not exceed $5 million. The business must be an operating business, for profit entity without religious affiliation. This type of loan is best suited for companies looking to borrow funds with a lower down payment than might be available through traditional bank loans.

What is the SBA 504 program?

An SBA 504 loan is another vehicle that many businesses use to finance expansion and growth, mainly as it relates to purchasing owner occupied real estate, doing construction and/or renovation, or purchasing fixed assets . While 7(a) loans are financed exclusively through banks in coordination with an SBA guarantee, a 504 loan is similar but involves a CDC (Certified Development Company), a nonprofit corporation that promotes economic growth and development in its communities through 504 loans. The division of costs with 504 loans is usually comprised of 40 percent from the SBA, 50 percent from a traditional lender/bank, and 10 percent from the borrower. The benefits of 10 percent down, longer amortizations, and fixed interest rates make this product very attractive to many borrowers. With this structure, the borrower will have two separate loans.

As with many government-backed programs, there are many nuances to these products and deciding which one is right for you can create challenges. At IBERIABANK’s Private Client Division, we take a consultative approach with our clients, learning as much as we can about their business and needs in order to provide sound advice on which route to take. If you are considering purchasing real estate, renovating, or otherwise expanding your business, it is of the utmost importance to find a banking partner that takes the time to understand your business and guide you through the myriad options available.

Carolina B. Menendez is senior vice president, Private Banking at IBERIABANK. She can be reached at 305-376-2427 carolina.menendez@iberiabank.com

Longer available terms, up to 25 years for real estate and 10 years on any other business asset: With longer amortizations come lower payments, which translates to improved cash flow for one’s business.

Lower equity requirements: One of the advantages of borrowing through the SBA is that one can borrow up to 90 percent of the value of the collateral in some cases. Traditional lending often requires a much larger cash outlay at the onset.

The “Small” in SBA is sometimes a misnomer. At first glance, one may think that because a company or firm earns healthy revenues every year, it may be too large to qualify for SBA assistance. The truth is, the SBA has different size requirements depending on the borrower’s industry and lending need, so it’s always a good idea to check with a banker to confirm eligibility.  The maximum dollar amount available through a single SBA loan can be up to $5.5 million, and in the case with 504 loans (described below), one may be able to borrow a larger amount in conjunction with a traditional bank loan.

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