The Small Business Administration loan often referred to as an SBA loan is designed to provide financing for the start up or the expansion of a business. SBA was originally designed for the new businesses but has been expanded in recent years to give much needed assistance to small businesses that are growing.
SBA loans are not made by the Small Business Administration. These loans are actually made by independent lenders and banks. The SBA simply provides insurance or a guarantee to the banks that make the loan. A portion of the funds you borrower are insured in case of default.
Important to Remember
It is important to understand how SBA works. When applying for a loan you will actually be working with a lender and their internal requirements first and then the lender will apply for the SBA guarantee.
This is an important fact to know because not all SBA loans are equal. Two different lenders may have completely different interest rates, qualifying ratios and LTVs for the exact same project. So when searching for an SBA loan your mega-bank may not give you the most favorable terms.
Two Types of SBA Loans
There are two general types of SBA loans. The SBA 7(a) is for new businesses. SBA 7(a) loans can be used to start a franchise or for a ground up start-up. These loans are for the new entrepreneur or the experienced business person seeking to launch an innovative product or service.
The other type of SBA loan is the SBA 504. The SBA 504 program is designed for business expansion. It is generally reserved for businesses that are doing well and are looking for funds to grow or modernize a facility or business process.
Real Estate & the SBA
Whether you are applying for an SBA loan or any other type of business financing there is one key factor that can increase your probability of success … real estate in the transaction. If you pledge real estate as collateral or are purchasing real estate as part of the start up, your chances of success will be greatly enhanced.
In the current market environment lenders are seeking more security for their money. Adding a tangible asset like real estate to the transaction increases the security for the lender and lessens their risk. With SBA loans you must plan to occupy at least 51% of the space, the rest can be used as rental to increase net cash flows to the business.
USDA – For Rural Development
The United States Department of Agriculture makes loans! That’s right, the USDA has programs for development of commercial enterprizes and businesses in rural communities.
These loans are designed to bring jobs to smaller communities and to assist in the growth and development of rural economies. These loans have easier qualifying than most conventional loans, rates are competitive and terms are very reasonable.
This loan is a great solution for any business or developer working outside of major metropolitan areas.