What to know before applying for an SBA 7(a) or 504 loan

Five tips for business owners
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When a standard commercial loan isn’t available for your small business, government-guaranteed financing may be the answer. Small Business Administration (SBA) loans are among the most popular options. We talked with our Senior Vice President and SBA Manager Walter McLaughlin about the SBA 7(a) and 504 loans, which he describes as “the two most utilized SBA product types.” And he offered tips for business owners interested in applying for credit.

The SBA’s most popular programs
SBA loans are designed to assist businesses in all phases of the business cycle, as they start, grow or expand operations. The loans are especially helpful when buying a business or real estate, as down payments can be significantly lower than in conventional lending. In addition, SBA loans typically have reasonable rates and fees. While they can be utilized during any phase of a business' life cycle, they tend to be more common early on or when the business sells to a new buyer. One goal of the SBA, Walter noted, is to help companies grow to the point where they “graduate” into regular commercial financing.

The SBA 504 loan is best suited for fixed assets like owner-occupied commercial real estate or heavy equipment. “It’s more narrowly purposed than the 7(a),” Walter explained, “but has key interest rate and structural advantages.”

With a 504, the borrower generally puts 10 percent down, a Certified Development Company facilitates a debenture  for 40 percent of the purchase price, and the bank finances the remaining 50 percent. As more parties are involved in a 504 loan, approval and processing can take a little longer. The assets being financed serve as collateral for 504 loans. You might consider a 504 if you prefer the certainty of a fixed interest rate for at least a portion of the financing and you plan to hold onto the property longer.

The SBA 7(a) loan is the most versatile and flexible, and is often the best choice for younger companies. It can be used for working capital/inventory, most debt refinance requests, change of business ownership, and when timing is critical. The 7(a) may also make sense in many owner-occupied commercial real estate purchases or refinances, given its shorter prepayment penalty requirements. Read our blog, Five Things to Know About SBA Financing When Buying or Selling a Business, for more on that.

Each SBA loan type has specific rules and eligibility requirements. A knowledgeable banker who understands your needs and goals can help you navigate the application process and determine the right financing for your situation. Expect them to explain the terms and discuss any fees and prepayment penalties, and how to avoid them.

Tips for potential SBA borrowers
Work with a bank and a banker who understand SBA programs. Find a good fit. “If you have an existing relationship with a banker,” Walter explained, “that’s a great place to start.”

If you’re unsure where to start and want to work with someone local, contact your district SBA office. They can provide a list of SBA lenders in your area and the number of SBA loans they processed the previous fiscal year by dollar amount. That will give you a sense of the bank’s experience with SBA loans in the dollar range you’re interested in. And while the SBA won’t recommend a specific bank, they can provide names of a few lenders that would work for you.

As an award-winning SBA-Preferred Lender, Banner has bankers who focus on SBA financing and can help streamline the application and approval process.

Get counseling from a Small Business Development Center or SCORE. These organizations provide low- and no-cost business training to help you prepare to approach a bank about a loan. They can help you with your business plan, cash flow projections and more.

Consider your long- and short-term goals. Talk with your banker about your plans and timeline. This is key to having the right financing for your situation. Do you plan to add staff and increase production? You don’t want to finance the purchase or construction of a commercial building, for example, only to quickly outgrow your space and become inefficient being locked into a long-term loan. Also be mindful of occupancy rules when using SBA financing for real estate.

Know the 5 Cs of credit. These are key criteria—traits of potential borrowers—a bank assesses when approving a loan to protect itself from loss and continue lending to others. They include capacity, capital, collateral, conditions and character. Read our blog, How to Master the 5 Cs of Business Bank Loans, to learn more.

Have a ‘plan B.’ Be prepared with an alternate loan request in case your banker says your initial request won’t work. “Think about what you can do to improve the loan request,” Walter advised. Could you put more money down, request a smaller loan or add a partner? You may negotiate, rather than accept a hard ‘no.’

For more insight into SBA financing, read our blog, Five Tips When Considering an SBA Loan.

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