SBA Loan Presentation Overview
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SBA loans can provide longer terms for borrowers and give lenders an incentive to make small business loans. They allow banks to provide funding even if their policies prohibit the loan. To qualify for an SBA loan, borrowers must demonstrate good character, management skills, a reasonable personal contribution, a feasible business plan, sufficient collateral, and an ability to repay the loan from cash flow. The 7(a) loan program guarantees loans up to $2 million that are negotiated between borrowers and lenders at rates up to 2.75% above prime. Guaranty fees are based on loan size and maturity.
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SBA Loan Presentation Overview
- 1. Presented by Bruce Hurta Business Lending Manager Members Choice Credit Union
- 2. SBA loans can provide longer terms for borrowers SBA loan guarantees give banker’s an added incentive to make small business loans SBA loan guaranties allow banks to provide funds when bank policy prohibits a loan
- 3. SBA Borrower RequirementsSBA Borrower Requirements Good character Management expertise and commitment to succeed Reasonable personal contribution or business equity Feasible business plan Sufficient collateral Ability to repay loan from projected operating cash flow
- 4. Basic 7(a) Loan Guaranty ProgramBasic 7(a) Loan Guaranty Program You apply for a loan guaranty with an SBA participating lender for loans $2,000,000 and under In some instances, lender submits application for SBA review and approval prior to disbursement of funds Other banks have full autonomy
- 5. TermsTerms Flexible maturities: ◦ Generally 7 to 10 years for equipment and working capital ◦ Generally up to 25 years for fixed assets: Real estate Construction Interest rates: ◦ Negotiated between borrower and lender ◦ Typically cannot exceed prime rate plus 2.75%
- 6. MaturityMaturity Total Loan AmountTotal Loan Amount Guaranty FeeGuaranty Fee Year or LessYear or Less Any amount up to $1 millionAny amount up to $1 million 0.25%0.25% Over 1 YearOver 1 Year $150,000 or less$150,000 or less 2.0%2.0% Over 1 YearOver 1 Year Over $150,001 to $700,000Over $150,001 to $700,000 3.0%3.0% Over 1 YearOver 1 Year Over $700,001+Over $700,001+ 3.5%3.5% * Fees apply only to guaranteed portion of loan* Fees apply only to guaranteed portion of loan
- 7. Fee Calculation Example ofFee Calculation Example of Waived FeesWaived Fees Total Loan x Guaranty % = Max. Guaranty Total Fee $150,000 x 85% = $127,500 $ 2,550 $700,000 x 75% = $525,000 $15,750 $1,000,000 x 75% = $750,000 $26,250
Notes de l'éditeur
- We at the Members Choice Credit Union appreciate this opportunity to visit with you today about SBA financing for business acquisitions. So many times small businesses do not get off the ground because one small piece of the puzzle is missing and that prevents them from fitting into existing lending policy at their financial institution. We hope this presentation will show you that the SBA can help you find that missing piece of the puzzle.
- SBA loan guaranties are extremely important for new businesses. Many banks are reluctant to lend money to small businesses, especially startups, due to a failure rate that is much higher than that for larger and established businesses. By providing loan guaranties to the bank that range as high as 90% of the total loan, the U.S. Small Business Administration gives the banker the incentive to help new enterprises get off the ground or to provide needed capital to expand. More importantly, SBA loan guaranties give the banker the flexibility to stretch out the terms for the loan to as much as 25 years for real estate and buildings, and as much as seven to 10 years for machinery, equipment and working capital. This allows the small business person to spread out their indebtedness over several years. This is particularly important in the early years when the possibility for failure is the greatest. Many banks have policies that prevent long-term lending, that prohibit loans to certain types of businesses or do not lend to startups. The SBA loan guaranties provide a bridge that allows the bank to make loans despite that policy. It truly is a win-win-win situation for the banker, the small business owner and the taxpayer. Almost everyone agrees, without the SBA, few, if any, of the businesses started with an SBA loan would be in existence today.
- The basic SBA requirements for the borrower include good character. This is generally reflected by a near spotless credit report and no recent arrests or convictions. The borrower needs to have management expertise related to the business and a commitment to succeed. Generally, the SBA prefers an equity injection of 25% to 33% of the total project cost and there should be a feasible business plan. There should also be sufficient collateral and, most importantly, the ability to repay the loan from projected operating cash flow.
- The mainstay of all SBA lending is our 7(a) Loan Guaranty Program. This program is an original part of the law that created SBA in 1953. All of our lending products are a part of this original section of the law, with the exception of our 504 fixed assets loan program. The 7(a) process is very simple. The borrower applies for a loan guaranty with an SBA participating lender. The lender submits an application to SBA for review and approval. After SBA approval, the lender disburses the funds. The process is really that simple.
- Loan terms are one of the many advantages that the SBA provides to small businesses and lenders participating in our loan guaranty programs. Our programs allow lenders to offer longer terms on their loans, thus improving the cash flow position of the small business and greatly increasing the chance for survival in the formative years. Terms are usually 7 to 10 years for working capital, and up to 25 years for fixed assets such as real estate, construction and equipment, with terms not to exceed the useful life of the equipment. The interest rates are negotiated between the applicant and lender and typically they cannot exceed the prime rate plus 2.75%.
- Fees for SBA loans are collected from the borrower by the lender. These fees are reasonable and necessary to help defray the cost of operating the loan guaranty program and reduce the subsidy provided by the taxpayers. For loans of one year or less, the fee is one-fourth of one percent. When the term of the loan exceeds one year, the fee is two percent for loans of $150,000 or less. When the loan exceeds $150,000 up to $700,000, the fee goes to three percent. Loans over $700,000 are subject to a 3.5% fee. Fees are paid only on the guaranteed portion of the loan. On loans of $150,000 or less, the lender retains one-fourth of the fee.
- This example will give you a more detailed idea of how the fees are structured on several different sized loans. As an example, total fees for a $150,000 loan are $2,550. Once the total loan goes over $150,000 the fees escalate to 3% up to $700,000. As you can see, the fees on a $700,000 are $15,750. The fees are calculated on only the SBA guaranteed portion of the loan that ranges from 85% on smaller loans of $150,000 or less and 3% to 3.5% on larger loans from over $150,000 to $2 million. The maximum fee that could ever be charged would be $35,000 where the guaranteed portion of the loan reaches $1 million. Considering that this capital would not likely be available to the small business without the SBA guaranty, these fees are very reasonable.