SBA (Small Business Administration) Loans
SBA loans are basically commercial loans that are guaranteed by the government. This allows banks to make loans to companies with a higher risk profile than those that they would otherwise normally fund. This means that some earlier-stage companies can use this as form of financing when they might not otherwise be able to get a commercial loan.
SBA loans require that the businesses that they fund have the following requirements:
- The business must be a for-profit business
- The applicant must have equity in the business (skin-in-the-game)
- The owner generally must have invested 25-50% of the total amount of the loan into the business
- The business cannot be speculative
- SBA loans often require personal guarantees
Types of SBA Loans
There are 4 types of SBA loans but the 7a is the most common for entrepreneurs. Below is a description of the types of loans:
- 7a Loans--these are the most common SBA loans and the best fit for most entrepreneurs. There are 4 subcategories:
- Express--get you a response to your loan request within 36 hours
- Export--SBA loans that are specifically designed to help finance companies to export their product or service
- Rural--SBA loans designed for rural businesses
- Special purpose--these are loans to help businesses impacted by NAFTA, to provide financial assistance to ESOP (employee stock ownership programs), or to help implement pollution control programs
- CDC / 504 --these are loans for acquiring fixed assets and are delivered through CDCs (Certified Development Companies) which are private, non-profit corporations set up to help the economic development of their communities
- Micro--these are SBA loans for less than $35,000 to be used for working capital financing
- Disaster--these are SBA loans to help homeowners, renters and companies of all sizes to recover from distasters
You can learn more about these loans on the SBA website.
Motivation and timing of investor
Banks are in the business of making money. They will look to get their principal back plus interest. They will generally want regular interest payments in the short-term though they may not need principal payments for some time.
Typical Amount of Funding
Up to $2M depending on your creditworthiness, collateral, and / or your company's creditworthiness.
Availability
Many commercial banks will make SBA loans though some will not. So SBA loans are widely available.
Interest and Principal Payments
SBA loans require interest and principal payments. Interest rates are generally 2.25-2.75 percentage points above the prime rate.
Equity
SBA have no impact on equity.
Control
The bank will generally make the company adhere to certain covenants. Common covenants include:
- Affirmative Covenants--things you must do
- Maintain legal existance of your company
- Stay current on taxes
- Have business insurance
- Must issue financial reports
- Negative Covenants--things you cannot do
- Have to limit how much debt you have
- Not allowed to issue dividends
- Not allowed to merge with or buy another company
- Cannot add any new liens to the company (at least those that are senior in the capital structure to the bank's loan)
validation / Other
SBA loans do provide some form of validation since banks are extremely cautious about the quality of companies to which they will lend their money.