Sometimes starting a small business or expanding an existing one can be a difficult proposition to finance. To help rectify that, the Small Business Administration (SBA) has designed a number of loan programs for business owners who may have trouble coming up with a large down payment or qualifying for a traditional bank loan.
Many banks and lending institutions participate in the programs. The SBA loan application is structured so that the loan is eligible for the SBA guarantee. A traditional lender participates in the loan process, and SBA guarantees a portion of the loan to the lender in case of default.
Recently, I spoke with Jon Kaye, regional sales manager for Wells Fargo. Wells Fargo has been the No. 1 lender in the nation for SBA loans for six straight years in terms of dollars loaned through the program.
When asked why someone should consider the SBA loan, Jon said, “It’s about capital preservation. The SBA program allows borrowers to put less money down and lower monthly payments.”
There are two main types of SBA loans in which Wells participates. The SBA 504 loan is for owner-occupied purchase of real estate or heavy equipment. The borrower can put down as little as 10 percent and finance the remainder. The SBA’s portion, 40 percent, is a 20-year fixed rate. Right now, that rate is around 4.6 percent. The bank would finance the remainder 50 percent at a negotiated rate and terms. A borrower can do some really big projects with this loan. The SBA limit is $5 million, but the bank’s traditional side can go up higher, yielding around $13 million in financed funds.
The second loan, SBA 7a, encompasses a lot more business needs. Real estate and business acquisition, partner buyout, working capital, leasehold improvements and equipment purchases are among the items the loan will finance. Most lenders require 10 percent down for this program. There is a $5 million maximum for the loan, and typically the traditional lender provides 90 percent of the financing. The advantage to the bank is that the SBA guarantees up to 75 percent of the loan. The advantage to the borrower is that, because of this guarantee the bank has less risk; and therefore, can pass along the reduced risk in a more affordable loan.
The SBA program continues to grow and provide more opportunities for small business owners. As Jon Kaye said, “We are encouraged by the way things are going...more and more borrowers see the advantages of SBA and are requesting financing.”