Protect and Grow Your Business with SBA Guaranteed Loans
When small businesses fail in the US, it's almost always due to inadequate funding. Despite possessing exceptional business models and exemplary management teams, companies can face the risk of closure when they are unable to navigate the challenges and financial constraints associated with the early stages of establishing a new business.
Some common issues that startups face include being unable to make payroll, buy the supplies and equipment they need, or replenish their stock. However, when business owners have enough funding to make it past the tough times that most startups face, they are often able to get in the green and establish successful businesses.
Small businesses, constituting over 99% of all enterprises throughout America, play a pivotal role as the foundation of the US economy. Furthermore, these small businesses have made a substantial contribution to job growth, generating over 12 million positions within the past three decades. Due to this swift expansion in employment opportunities, small businesses currently provide jobs for nearly half of the nation's workforce.
The Small Business Administration
The Small Business Administration was created in 1953 by President Eisenhower to protect and support small US businesses. Among its key functions, the SBA facilitates access to essential financial resources for small businesses by administering government-backed loans.
In the year 2023, the White House implemented new regulations for the SBA loan program, aiming to broaden the pool of SBA lenders, simplify the loan application procedure, and fortify safeguards against fraudulent activities. These measures were put in place with the overall objective of enhancing the SBA guaranteed loans program, which in turn facilitates equitable access to essential funding for small business owners and aspiring entrepreneurs.
SBA Guaranteed Loans
When business owners apply for loans through a private bank, there are additional requirements that banks will consider that don’t always apply to requesting a personal loan. Due to their status as self-employed individuals, business owners might not always meet the eligibility criteria for private loans, regardless of what their credit score might be.
Banks will usually stipulate that business owners need to have sufficient collateral to cover the amount of the loan in the case of a default, but most business owners don’t want to put their homes on the line in case their businesses should fail. With SBA guaranteed loans, the federal government backs the loan up to a certain percentage of the total amount, which provides extra security for lenders.
There are two types of SBA guaranteed loans, and each one has its own limitations and purposes:
SBA 7(a) Loans
The SBA 7(a) loan is the most common type of SBA guaranteed loans since it is more flexible in its requirements and uses. SBA 7(a) loans can be used by small businesses to increase their working capital to cover the day-to-day costs of doing business, expand or acquire businesses, refinance business debt, and more.
Anyone can apply for an SBA 7(a) loan, but lenders will thoroughly evaluate borrowers before approving their applications. They might consider factors like experience, education, business plans, credit history, and cash flow. However, banks will almost always want borrowers to invest some of their own capital to ensure that they are committed to the business’s success. This greatly increases the chances that they will abide by the terms of the loan.
Business owners are able to borrow up to $5 million under this SBA guaranteed loans program, and the terms for repayment will vary depending on the loan amount. For loan amounts up to $150k, the SBA can guarantee up to 85% of the total loan amount. For loans over $150k, the SBA will only back up to 75% of the loan amount.
The repayment terms for SBA guaranteed loans vary depending on their intended use, spanning from 10 to 25 years. When utilized for real estate purposes, the loan repayment period can extend up to 25 years. Conversely, for general-purpose loans, the repayment duration typically spans up to 10 years.
SBA 504 Loans
This class of SBA guaranteed loans is specifically designated for helping businesses finance long-term assets such as large equipment and real estate. Because these types of loans are usually for larger sums of money, the structure is more complicated than that of the SBA 7(a) loan. The SBA 504 is backed by the SBA, but it involves two lenders. One of these lenders will be a private bank approved by the SBA for issuing SBA guaranteed loans. The other portion of the SBA 504 loan is distributed by a Certified Development Company. CDCs are non-profit corporations certified by the SBA to participate in the SBA 504 program.
In the case of this type of loan, an approved private SBA bank assumes responsibility for 50% of the total loan amount, while the CDC typically covers up to 40%, depending on the business owner's contribution. While business owners have the option to contribute more if desired, a minimum contribution of 10% of the total loan amount is required for approval.
Under the SBA 504 program, small business owners have the potential to secure loans up to $5 million. But when borrowers meet certain criteria related to public policy goals, they may be eligible for loan amounts up to $5.5 million.
The duration for repayment of the CDC's portion of the loan can range from 10 to 20 years, contingent upon the loan amount. However, the repayment period for the private portion of the loan is typically shorter.
Apply for SBA-Backed Loans from Farmers Bank
Since the government has expanded its base of SBA-approved lenders, Farmers Bank is now able to assist small business owners in getting access to the capital they need to grow their businesses successfully. If you want to take advantage of SBA guaranteed loans offered by Farmers Bank, get in touch with one of our loan specialists to set up an appointment. They will assess your eligibility for this program based on the SBA's criteria. If you qualify as a suitable borrower, we are committed to assisting you in securing approval for the loan.