What It Is: Term loans from a bank or commercial lending institution of up to 10 years, with the Small Business Administration (SBA) guaranteeing as much as 80 percent of the loan principal.
Appropriate for: Established small businesses capable of repaying a loan from cash flow, but whose principals may be looking for a longer term to reduce payments or may have inadequate corporate or personal assets to collateralize the loan.
Supply: Vast. The SBA guarantees some $12 billion per year in loans.
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Best Use: Purchasing equipment, financing the purchase of a business and in certain instances, working capital. The SBA guarantee can help borrowers overcome the problems of a weak loan application associated with inadequate collateral or limited operating history.
Cost: Comparatively inexpensive. Maximum allowed interest rates range from highs of prime plus 6.5 percentage points to prime plus 2.75 percentage points, though lenders can and often do charge less. These rates may be higher or lower than rates on nonguaranteed loans. What's more, banks making SBA loans cannot charge "commitment fees" for agreeing to make a loan, or prepayment fees on loans under 15 year (a prepayment penalty kicks in for longer loans), which means the effective rates for SBA loans may be, in some instances, superior to those for conventional loans.
Ease of Acquisition: Challenging. Although the SBA has created streamlined approaches to loan applications, conventional SBA guarantee procedures and protocols pose a significant documentation and administrative challenge for most borrowers.
Range of Funds Typically Available: The SBA guarantees up to $1 million of loan principal.
First Steps
While most banks, as well as select commercial finance companies, offer SBA loans, there are two specialized categories worth knowing about. These are Certified Lenders and Preferred Lenders, both of which have entered into contractual relationships with the SBA and officially participate in the Certified Lender/Preferred Lender programs (CLP/PLP).
These lender programs were designed to provide better response to borrowers; they accomplish this goal by placing additional responsibilities on the lenders for analysis, structuring, approval, servicing and liquidation of loans, within SBA guidelines.
About 850 lenders qualify for the SBA's Certified Lender Program, having met certain criteria, the most important of which, from the borrower's perspective, is extensive experience in SBA loan-guarantee processing. Certified lenders account for about 4 percent of all SBA business-loan guarantees. Since the certified bank does much of the SBA's work, the agency offers turnaround times of three business days for processing the application.
Approximately 450 lenders meet preferred lender standards. This group processes approximately 21 percent of SBA loans. Preferred lenders have full lending authority and as a result can offer a one-day turnaround on completed loan applications.
If you are seeking an SBA loan, your best bet is to work with a certified or preferred lender. The SBA-guarantee process is tricky at best, and you want a lender who has been through it more than once. To find certified or preferred lenders, visit the SBA Web site at www.sba.govor call your local SBA office for guidance.