Business Loans & Working Capital
Business Loans, often referred to as Small Business Loans are generally offered through a government sponsored program from the SBA. 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. Small business loans of this nature were originally designed for new businesses but has been expanded in recent years to give much-needed assistance to small businesses that are growing.
Working capital loans are different from a traditional business loan. As a matter fact, working capital loans shouldn’t be considered loans at all. They are essentially short term investments in a business. As such, working capital loans look like they have high interest rates, however, when compared with actual equity investments from real investors, these loans actually are extremely economical. With equity investments the investor typically wants large percentages of the profits and some type of control over the business (i.e. an ownership stake) however, with working capital loans the business owner never gives up an ownership interest making this a much better investment to receive than equity. Click here to learn more about working capital loans.
On the other hand business loans provide capital to acquire or recapitalize business assets like equipment and real estate. Business loans can be used, for example, to purchase a fleet of vans; new manufacturing equipment; an office building, warehouse or manufacturing facility; or even an entire business. The use of funds from a small business loan are almost limitless as long as the funds are specifically targeted towards growth of the business enterprise.
The very popular SBA loan is not made by the Small Business Administration. These small business loans are actually made by independent lenders and banks. The SBA simply provides insurance or a guarantee to the banks that make the business loan. A portion of the funds borrowed by the business are insured in case of default.
Important to Remember
It is important to understand how small business loans work. When applying for a business loan the business owners will actually be working with a lender and the business lender’s internal requirements first and then the small business lender will apply to the SBA for a guarantee.
This is an important fact to know because not all business loans are equal. Some business loans do not qualify for the SBA guarantee at all. Business loans in excess of $5 million or that are to risky may have to go a different route. (Note: there is bridge lending, equity investments and senior debt. Contact us to find out more about these types of business loans)
It is important to know that each different lender may have completely different interest rates, qualifying ratios and LTVs for the exact same project. So when searching for a business loan remember that the mega-bank around the corner may not give you the most favorable terms.
Two Types of Business Loans
There are two general types of business loans. The SBA 7(a) is for new businesses. SBA 7(a) small business loans can be used to start a franchise or for a ground up start-up. These business loans are for the new entrepreneurs or the experienced business person seeking to launch an innovative product or service.
Within the SBA 7(a) category there has been a shake up. Most traditional banks will not make an SBA loan for less than $500,000. This has created a new category for SBA 7(a) often referred to as micro-SBA or mini-SBA loans. These loans are typical SBA loans, however, they allow for sub-$500,000 loan amounts and will go all the way down to as low as $50,000. Learn more…
The other type of small business loan is the SBA 504. The SBA 504 program is designed for business expansion. It is business loan that is generally reserved for businesses that are doing well and are looking for funds to grow or modernize a facility or business process or looking to purchase an office, warehouse or some other type of facility or real estate.
Real Estate & the Small Business Loan
Whether you are applying for an SBA loan or any other type of small business financing there is one key factor that can increase your probability of success … real estate in the transaction. If a business pledges real estate as collateral or are purchasing real estate as part of the business loan plan, the chances of success and a timely business loan closing will be greatly enhanced.
In the current market environment small business lenders are seeking more security for their money and many lenders like the SBA 504 small business loan program. Adding a tangible asset like real estate to the business loan transaction increases the security for the lender and lessens their risk. With SBA loans and many alternative business loans the business 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 Loans – For Rural Development
The United States Department of Agriculture makes small business loans! That’s right, the USDA has programs for development of commercial enterprises and small 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 business loans have easier qualifying terms than most conventional business loans, rates are competitive and terms are very reasonable.
This business loan is a great solution for any business or developer working outside of major metropolitan areas. The subject property must be in a USDA-designated qualified area.
Need help with or advise about purchasing commercial real estate?
Dividend America Commercial Lending is partnered with licensed Commercial Real Estate Brokers around the Nation. We can get you the advise you need and connect you with a real estate professional in your area who will represent your interest and find the property that is right for you! Start by connecting with our primary partner to get your questions answered today! SBA – Commercial Real Estate Experts