The Small Business Administration is a government agency dedicated to help small businesses with their legal, financing and training needs. The SBA is not a direct lender. Instead, it guarantees and sets the guidelines for the loans its lending partners provide. The SBA guarantees up to 85 percent of a business loan's principal, which reduces the risk for lenders and allows them to have more flexible eligibility requirements and lower interest rates.
Loan applications must be processed through an SBA lending partner. You can find a list of approved lenders by state or zip code on SBA.gov. The lender you choose will be in charge of the transaction but must follow the guidelines set by the SBA.
Interest rates are determined by each individual lender but must fall within the maximum rate set by the SBA. The SBA's maximum rate is determined by a base rate: the London Interbank One Month Prime, also known as LIBOR, plus 3 percent and an SBA peg rate that depends on the length of the loan's term. Loans with a term of less than seven years have a maximum spread of 2.25 percent, while loans with a term of seven years or more have a spread of 2.75 percent. This means that if the LIBOR rate 0.25 percent, SBA lenders could charge a maximum of 6 percent for loans with terms longer than 7 years.
On top of interest rates, SBA lenders can also charge fees of up to 3.75 percent of the loan principal. However, loans of less than $150,000 do not come with fees.
The SBA has two main loan programs: the SBA-504 and the SBA-7(a). The SBA-504 loan program, has maximum loan amounts of $20 million and higher, while the SBA-7(a) loans are for a maximum of $5 million. The average loan amount in 2012 for an SBA-7(a) loan was $337,730.
The SBA guarantees loans in all 50 states.
The application process varies by lender but typical requirements for an SBA loan application include information on personal background, resumes of the management team, a business plan, personal credit reports of the principal business owners, a business credit report, income tax returns for the last 3 years, company financial statements, bank statements, legal documents and in some cases collateral.
SBA loans are only for businesses who cannot access other forms of financing on reasonable terms. The SBA acts as a guarantor for businesses who don't qualify for commercial business loans and would otherwise have to resort to high-interest loans from alternative lenders. SBA lenders must follow strict guidelines, which protects borrowers. Also, interest rates and fees for SBA loans are generally more favorable than those offered by non-SBA commercial loans.
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