Andrew Ten, Lender Relations Specialist
U.S. Small Business Administration – Los Angeles
District Office
SBA Loan Programs
General Overview Training
SCORE Los Angeles Chapter
September 21, 2016
SBA Loans - Fundamentals
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Discussion Outline
Who is the SBA?
What is an SBA Loan?
Benefits of SBA Programs to Borrowers and Lenders
General SBA’s Eligibility Requirements and Size Standard
Major SBA Programs: 7(a), 504, and SBAExpress
Basic Credit Requirements
Loan Application Preparation
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SBA History & Background
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The Small Business Administration (SBA) is a United States government agency that
provides support to entrepreneurs and small businesses.
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The SBA was created on July 30, 1953, by President Eisenhower with the signing of the
Small Business Act.
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The mission of the Small Business Administration is "to aid, counsel, assist and protect
interests of small business concerns, to preserve free competitive enterprise and to
maintain and strengthen the overall economy of the nation."
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What is an SBA Loan?
• An SBA Loan is a business loan, not a personal loan or a grant.
SBA Loans are guaranteed loans through a Lender.
• The amount guaranteed depends on the dollar amount of the
loan and the specific program the lender may use.
Typical Scenario: A lender will review an applicant’s business plan, financial
information, character and credit history. The lender will make a decision to work
with the business owner/member on a conventional lending basis or to seek an
SBA guarantee to reduce their exposure.
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Some reasons a lender will request an SBA guarantee is (1) collateral available does not meet
conventional requirements, (2) term needed to repay the debt is not available conventionally,
(3) type of business: either a start-up or a higher risk industry.
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Benefits to Business Owners
• Purpose – provide financing to those creditworthy small businesses that do no
qualify for conventional credit
• Benefits
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Small business receives financing
Lender retains a customer and expands market share
Up to 90% financing for commercial real estate transactions
Longer term = smaller payment = qualified easier
Full amortization and no balloon payments = save time, paper work, hassle
and $$
• Finance non-conventional and special-purpose credits, such as start-up
businesses, business acquisitions, gas stations, car washes, restaurants,
healthcare facilities, hotels/motels, auto shops, etc.
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Benefits to Lenders
• Government guaranty of 50% to 90%:
• Reduces lender’s risk of loss
• Reduces lender’s capital requirement for its small business loan portfolio
• Allows increased market share
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Primary Eligibility for SBA Loans
To be eligible for an SBA business loan, a small
business applicant must:
1) Be an operating business
2) Organized for profit
3) Located in the United States
4) Be small based on regulatory size
requirements (13 CFR Part 121)
5) Demonstrate a need for the desired credit
Exploring Member Business Loans with SBA
guarantees
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General SBA Eligibilities
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Borrowing entities’ major shareholders are either U.S. citizens, permanent residents or legal aliens
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SBA’s size standard: Net Income <= $5MM and Total Business Net Worth <= $15MM
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Ineligible Businesses:
Non-profit businesses
Businesses engaged in lending
Shopping centers, apartment buildings are not eligible
Businesses located in a foreign country
Business loans to individuals not lawfully in the United States
Businesses selling through a Pyramid Plan
Businesses deriving more than 1/3 gross annual revenue from legal gambling activities
Businesses engaged in illegal activities
Businesses which restrict patronage such as men or women only health clubs
Government owned entities
Businesses teaching, instructing religion or religious beliefs
Businesses owned by persons of poor character
Businesses in which the Bank or affiliates owns an equity interest
Businesses providing prurient sexual material
Businesses that have previously defaulted on Federal or Federal assisted financing
Businesses primarily engaged in political or lobbying activities
Speculative businesses
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SBA Loan Program Overview
• SBA does not make direct loans to borrowers (except
disaster assistance loans), but uses a network of SBA
approved lenders (i.e. you)
• Again, SBA provides a loan guaranty only, backed up
by the U.S. Government
• There are many SBA programs, but two major
programs:
1. SBA 7(a)
2. SBA 504 programs
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SBA 7(a) Guaranty Loan Program
• The SBA’s primary lending program. A regular 7(a) loan has a maximum
loan amount available of $5,000,000 which the Agency guarantees 75%, or
$3,750,000. If the loan amount is $150,000 or less, the Agency guarantees
85%
• Use of Proceeds:
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Purchase machinery & equipment
Working Capital
Leasehold Improvements
Receivables & Inventory
Refinance existing debt
Acquisition/Construction of real estate
Business acquisitions (purchase of business)
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SBA 7(a) Guaranty Loan Program
• Maturities
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Based on use of proceeds & ability to repay
Up to 10 years for working capital
7 to 10 years for machinery & equipment
25 years for real estate – maximum maturity
Weighted average for multiple purposes
• Interest Rates
• Can be negotiated between lender and borrower
• Primarily based on WSJ Prime + Spread
• Other base rates include LIBOR 1-month + 3%, or SBA Peg Rate
• SBA Guidelines based on loan maturity & amount
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< 7 years: Max. Rate = Prime + 2.25%
>= 7 years: Max. Rate = Prime + 2.75%
Rates slightly higher for loans of $50k or less
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SBA 504 Loan Program
• This is the 2nd most popular and major SBA program. This
program provides up to 90% financing
• Lender (no SBA guaranty) lends up to 50% secured with 1st
mortgage; SBA (through a Certified Development Corp.)
guaranties (100%) finances up to 40% secured with a
subordinate lien/2nd mortgage on the assets being acquired;
borrower typically provides 10% equity down payment
• The loan has a maximum SBA guaranty loan amount available
of $5,000,000, but project size could be larger
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SBA 504 Loan Program
• Use of Proceeds:
• Acquisition/Construction of commercial real estate, including land
• Purchase capital equipment
• Maturities
• 10 or 20 year fully amortized term (on SBA 2nd)
• Varies with the Lender 1st, but usually is comparable to the term of the SBA
2nd loan
• Interest Rates
• Below market fixed rate:
• 2nd SBA/CDC is usually based on 10 year Treasury + margin (~2.5 – 3.0%)
• 1st Lender is comparable in their rate, but usually slightly above
SBA/CDC’s rate – can be based on any COF index
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SBA 7(a) SBAExpress Lines of Credit
• Loan Purpose: short-term working capital
• Maximum Loan Amount: $350,000
• Maximum Guaranty Percentage: 50%
• Term: up to 7 years
SBA Loans - Fundamentals
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Basic Credit Criteria (5 Cs)
• Cash Flow
• Collateral
• Credit History
• Character
• Capacity
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Profile Questions to ask…
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How long have you been in business? (A: 3 years or greater)
What was your prior full year revenue? (A: $500K or greater)
How much of a loan are you looking for? (A: $100K or greater)
What was your Net Profit/Income for the prior year?
(A: preferably at least 10% of requested loan amount)
• What is the loan for?
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Building Purchase
Debt Refinance
Purchase Inventory
Expansion/Acquisition
Working Capital: (details) __________________________
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Minimum Information – Loan Application
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Up to 3-year business tax returns
Up to 3-year personal tax returns (20% ownership or greater)
Personal Financial Statement
If you have or able to obtain:
– Debt Schedule for all entities
– Income Statement (P&L) and Balance Sheet for all entities (20% or
greater)
– Credit Report Consent Form from all guarantors
– Purchase Agreement (if purchase)
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SBA References
Code of Federal Regulations (CFR): CFR Title 13, Parts 120 and 121
Standard Operating Procedures (SOP) for loan originations: SOP 50 10 5 (H)
SBA Lender Resources: http://www.sba.gov/for-lenders
SBA Forms, SOP, Notices, and Loan Packages:
http://www.sba.gov/lender-documentation-tool
Franchise Reviews/Questions:
www.franchiseregistry.com or franchise@sba.gov
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More Info & Questions?
SBA website: www.sba.gov
THANK YOU FOR YOUR TIME AND ATTENTION!
ANY QUESTIONS?
Andrew Ten
Lender Relations Specialist| U.S. Small Business Administration – L.A. District Office
330 North Brand Blvd., Suite 1200, Glendale, CA 91203
Phone: 818-552-3314 | Fax: 202-481-5678 | E-mail: Andrew.Ten@sba.gov
“Aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns”
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