In a recent survey, the percentage of business owners reporting a somewhat to very good current financial situation, cash flow and revenue is at its highest point in seven years. It’s an indicator that the economy is improving for small businesses. Healthier businesses in stronger industries are in a better position to get approved for credit and business owners are more confident about pursuing financing for their business.
As the economy continues to improve in 2015, it’s a great time for small-business owners who are looking to expand their operations to work with a banker and explore their financing options. With low interest rates and favorable real estate values, we’re seeing more small-business owners looking to expand into larger facilities or purchase their own land and buildings. Small-business owners have a range of financing options to consider for their specific needs, including conventional business term loans and government-guaranteed term loans.
For many small businesses that need funds for a real estate purchase and expansion, or to acquire another business and manage cash flow, the SBA 7(a) term loan is a great option to consider. So what’s an SBA 7(a) loan and what type of business should consider pursuing this financing? Here are a few quick facts on SBA 7(a) loans.
NAME: Katrina Tracy
TITLE: SBA Development Officer
ORGAN-
IZATION: Wells Fargo
Why the SBA 7(a) program? This year, thousands of America’s 28 million small-business owners will turn to the SBA 7(a) program for financing. The U.S. Small Business Administration, which does not directly make loans, provides a guarantee for SBA loans made to small businesses by banks and other lending institutions. Because the SBA guarantees a portion of the 7(a) loan, SBA lenders are able to offer an alternative to creditworthy business owners who may not be able to obtain conventional bank financing.
Eligibility: To be eligible for the 7(a) loan program, a business must operate for profit and qualify as a small business as defined by the SBA. Also, businesses cannot have a tangible net worth that exceeds $15 million or an average net income of greater than $5 million over the past two years. For more information on eligibility, the SBA has identified specific businesses that are not eligible for 7(a) loans.
Basic uses: Typical uses of a 7(a) loan, which have a maximum amount of $5 million, include the following: to purchase equipment, machinery, furniture, fixtures, supplies or materials; to purchase real estate, including land and buildings; to construct a new building or renovate an existing building; to establish a new business or assist in the acquisition, operation or expansion of an existing business; and to refinance existing business debt, under certain conditions.
Advantages: The 7(a) loan offers flexibility, such as longer terms and lower down payments, compared to other types of business financing. With longer terms, business owners typically have lower payments, and are able to retain working capital and maximize cash flow to grow their businesses.
Fees and interest rates: Loans guaranteed by the SBA are assessed a guarantee fee based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. As a way to encourage more small loans, the SBA is waiving fees for loans less than $150,000.
Interest rates on 7(a) loans are typically negotiated between the borrower and the lender, and subject to SBA maximums. Both fixed and variable interest rate structures are available.
Terms: SBA loan programs are generally intended to encourage longer-term small-business financing. Loan terms are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan terms have been established: 25 years for real estate; 10 years for equipment (or demonstrated useful life); and 10 years for working capital or inventory loans.
According to statistics compiled by the SBA, approximately 95 percent of all small businesses are eligible for SBA assistance. To ensure the success of an SBA loan request, a business owner should look for a bank that is part of the SBA Preferred Lenders Program, as PLP providers have been delegated by the SBA for loan approvals, closing and servicing authority.
Most lenders will also ask for a comprehensive business plan that clearly states the goals and objectives for the business, as well as information about your experience and management capabilities. Check with your banker for specific support in preparing or updating your business plan. Once you have decided to apply for a loan guaranteed by the SBA, use this checklist to ensure you have all the necessary documents for your application.
The best way to know if an SBA loan is the right option for your business is to talk with your banker. A full-service provider of financial services can help you evaluate all of your financing options, including SBA loan products, and provide guidance to help your company achieve new levels of success. In an improving economy, small businesses have the opportunity to secure a great loan product with excellent terms and help make 2015 the launching pad for future success.
Katrina Tracy is the SBA Development Officer at Wells Fargo and is based in Albuquerque. She can be contacted at katrina.m.tracy@wellsfargo.com”>href=”http://katrina.m.tra”>katrina.m.tracy@wellsfargo.com.