Once again I have invited Bryan Jasin to be a guest contributor on this SBA topic - Bryan leads the Franchise Specialty Banking Group at The Huntington National Bank in Columbus, Ohio and serves on the Membership Committee for the International Franchise Association.
The Small Business Administration manages a lending program to promote business ownership and entrepreneurship in the U.S. Think of the program as the government sets the rules to make a loan and if that loan goes bad, then the government will provide a guarantee for some of the debt. This encourages banks to lend into businesses where there may not be historical cash flow, sufficient collateral, or other considerations with the transaction. My goal today is to provide a high-level view of the three core programs and some key considerations.
The SBA Express Program: This program is for loan requests up to $350,000 and offers a borrower a faster loan process with fewer collateral and loan requirements. The SBA does not require full collateral coverage in this program, but any individual bank may require full coverage. Most borrowers use this program to start a small business, expand a current operation, acquire a business or purchase a piece of real estate or equipment. The program offers a 50% guarantee on any loan loss to the bank after all collection efforts have been exhausted.
The 7(a) Program: This program is generally for loan requests from $350,000 to $5,000,000 and generally used for a startup business loans, business acquisition loans and real estate purchase loans. Maximum terms generally cap out at 10 years or up to 25 years if real estate is involved. The SBA requires a minimum 10% equity into the transaction, but banks often may require more based on the loan structure, industry, and use of proceeds. This program offers a 75% guarantee.
The 504 Program: This program is generally a real estate acquisition and development loan program. The program requires a 10% equity injection from the borrower, a bank loan up to 50% of the real estate value, then a 40% secondary loan from a corresponding community development corporation (CDC) that is in a second lien position and then often sold to the investor market. The primary 50% loan cannot exceed $5,000,000 so often this program is used for larger real estate purchases. The maximum term and amortization is 25 years.
Key Program insights to remember:
• The maximum exposure to any one borrower is $5,000,000.
• There are “credit elsewhere” tests to ensure the loans go to borrowers who need the support – if a bank can qualify the loan conventionally, it cannot go to the SBA program.
• Most loans over $350,000 require the bank to fully collateralize the loan which means the bank often will take all available personal collateral such as equity in your primary residence or other available collateral
As a former SBA leader once told me, “the SBA program does not make a bad loan a good one, but a good loan a great one!”
Thank you Bryan.