SBA Loans for Improving or Expanding Your Business
December 05, 2017
Access to financing can be the life blood for most closely held businesses. In this episode of “The Bottom Line,” EisnerAmper manager Tim Schuster looks at several categories of Small Business Administration (SBA) loans. He covers what lenders examine in the approval process as well as how business advisors can help you make the most of the process.
DP: Tell us the difference between SBA, or Small Business Administration loans, and traditional commercial loans, which we’ll save for another day.
TS: The SBA really doesn’t make a loan. However, it does guarantee the bulk of the loan, be it from a bank, a credit union, an alternative lender or some other. This decreases the risk to the lender and makes it more likely for a business to get approved for an SBA loan. In short, it increases access to capital, which is what every business needs in order to grow.
DP: There are several types of SBA loans, correct?
TS: Yes. The first one that comes to mind is probably the most common one, which is SBA 7A. This one is for working capital, fixed assets and debt refinancing, and that’s up to about $5 million. There’s a micro loan and, as you can tell, it’s going to be smaller. That’s up to about $50,000, and the maximum term is six years. This is used predominantly for working capital or fixed assets, and this cannot be used to purchase real estate or pay an existing debt.
TS: SBA 504 is long-term, fixed-rate financing for equipment and real estate. The maximum 504 portion is $5.5 million for manufacturers and green projects. The green projects should have about a 10% reduction in carbon emissions. So there is a stipulation for anything that’s under the “green umbrella.” All other projects under the 504 have a maximum of $5 million. So the typical deal is about $12.5 million. Just something to keep in mind when you’re looking for a loan of that size.
TS: Disaster – we actually briefly spoke about this in a prior podcast–and it covers business assets that were damaged or destroyed in a declared disaster. So what you’ve been hearing recently with hurricane relief efforts in Houston or the California wildfires, for example. There are loans that you can take out in order to recover, and they are extremely affordable and offer low interest for consumers. The loan itself is usually typically up to about $2 million.
CAP lines is another type of SBA loan. There are several lines of credit programs to meet short-term and seasonal working capital needs. There are four types and the maximum term is about 10 years and for $5 million.
TS: An Export loan is, as indicated, for any sort of exporting activities–engaging in international transactions and entering into new foreign markets. There are three different types – international trade, EPWC, and export express and are up to 25 years and $5 million.
DP: It’s my understanding that there are some derivatives of these loans, such as loans for veterans and so on.
DP:We stated earlier that the SBA doesn’t make the loan. But do the lenders examine any different criteria when they’re looking at loan parameters, or are they looking at the traditional things that lenders usually look at?
TS: The bank will ultimately make the decision, but it will also look at traditional loan parameters such as financial statements, sales tax data, income tax returns, collateral, credit scores, and any history of borrowing or bankruptcy. It’s as if you’re applying for any other type of loan in the marketplace.
TS: You need to fill out those sheets that come from the bank looking for your personal financial information. It’s the same exact concept.
TS: The SBA has two major requirements–you need a net worth of $15 million or less, and the applicant must have a two-year average net income of $5 million or less. Again, this is for small businesses.
DP: What’s the role of the business advisor here?
TS: We can help determine the need for a loan, establish which type would be the best fit, expedite the paperwork involved in applying for an SBA loan, implement the loan and assess the effectiveness. If we go through this process and the loan isn’t working, then let’s try something else. You might have thought you needed a micro loan, but it’s too small so you really need a larger loan. So you just want to make sure you keep your business advisor in the loop during this process.
DP: Good. Well you know what time it is Tim. Our listeners just can’t get enough. It’s time for your New Jersey Historical Society fun fact.
TS: I think everyone’s going to love this one because this is a hotly debated subject that’s been going on since the 1800s. Where is the Statue of Liberty located? New Yorkers say it’s in New York and New Jerseyans say it’s in New Jersey. I did a little bit of digging. The land on which the statue stands is actually owned by New York, but the water surrounding the statue is actually located in Jersey City, New Jersey. Now what? I dug a little deeper and found on the citizenship exam acceptable answers for where the statue is located are New York, near New York City, or New Jersey.
DP: Interesting. So we’re going to straddle the fence on this one?
TS: We’re straddling the fence.
DP: We’re not going to pick one?
TS: We’re olive branching this one.
DP: Alright. We want to keep the peace between the great state of New York and the great state of New Jersey.
DP: Tim, thanks for this valuable information.
TS: My pleasure.
DP:And thank you for listening to “The Bottom Line” as part the EisnerAmper podcast series. If you have any questions or there’s a topic you’d like us to cover, email us at contact@EisnerAmper.com. Visit EisnerAmper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.