When it comes to SBA financing, there are various loan programs offered and a lot of information to take in on the subject. The right choice of financing for a borrower within these programs will vary depending on your individual needs. SBA loans are made by a private lender and guaranteed up to 80 percent by the SBA, which helps reduce the lender's risk and will help the lender provide financing that's otherwise unavailable, at a reasonable rate. To obtain an SBA loan it is important to remember one must qualify as a small business according to the SBA standards, which vary from industry to industry.
One of the more popular loan programs offered through the SBA is called the 7(a) General Business Loan Guaranty Program. This loan is often used by borrowers for a business start-up or to meet various short-term or long-term needs of existing businesses, such as purchasing equipment, replenishing inventory, real estate purchase, or working capital. This type of loan is generally guaranteed up to $750,000. The guaranty rate is 80 percent on loans of $100,000 or less and $750,000.
State Business and Industrial Development Corporations (SBIDCs) are capitalized through state governments. They usually offer long-term loans, which vary from 5-20 years, for either the expansion of a small business or for the purchase of capital equipment. Lender requirements and rates of interest vary from state to state. Some SBIDCs will commit funds to very high-risk ventures, whereas others will look for minimal risk.
CDC-504 loans provide fixed-asset financing through Certified Development Companies (CDCs). These nonprofit corporations are sponsored by private-sector organizations or by state and local governments to contribute to economic development. The 504 CDC Loan Program is designed to enable small businesses to create and retain jobs-the rule of thumb is one job for every $35,000 provided by the SBA.
The interest rate charged on SBA guaranteed loans is based on the prime rate. While the SBA does not set interest rates, since they are not the lender, it does regulate the amount of interest that a lender may charge an SBA borrower. If the loan has a term of seven years or more, the SBA allows the lender to charge as much as 2.75 percent above the prevailing prime rate. If the loan has a term of less than seven years, the surcharge can be as much as 2.25 percent.
Some examples of assets that are commonly used and accepted as sources of collateral for SBA loans include various forms of property, life insurance policies, accounts receivable, stocks and bonds, chattel mortgages, personal endorsement of a guarantor or warehouse receipts for marketable merchandise.
In exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or to meet certain public policy goals. Businesses that meet these policy goals are those whose expansion will benefit business district revitalization (such as an Enterprise Zone), a minority-owned business, or rural development.
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