Hosted by
SBA Business Loans
Established in 1953, under President Eisenhower, the Small Business Administration (SBA) works with private lenders, such as banks, as well as a variety of regional nonprofit groups, to make business loans for various entrepreneurial uses. Since its inception, the SBA has helped make $208 billion in loans to nearly 1.3 million businesses — more than any other single lender in the country during that time.
Currently, there are three main programs available. Here are some of the types of SBA loans available from Wells Fargo Bank.
- SBA 7(a) Term Loan
- SBA 504 Term Loan
- MicroLoan
SBA 7(a) Term Loan
The 7(a) program, the government's biggest small-business loan operation, makes loans up to $2 million. In 2003 the SBA helped make 74,825 loans totaling $12.55 billion under 7(a). The average loan size was $167,780.
What it's for
This type of loan can be used for a variety of business purposes. A start-up or existing business can use the money to finance purchases of land, buildings, equipment, furniture or inventory, as well as cover accounts payable and other short-term working-capital needs.
Applicants' eligibility is based on the ability to repay the loan from cash flow, as well as collateral, management capability and owner's equity contribution.
In addition to the main 7(a) loan, there are several aligned niche loans including specific financing for exporters, pollution-control efforts and employee stock ownership plans (ESOPs). There are also a number of types of credit lines, including a line especially for small general contractors and a seasonal line for businesses that may need extra cash to purchase inventory for peak seasons like Christmas.
How to get one
Through a conventional commercial lender such as Wells Fargo Bank. Borrowers typically make a down payment or show equity ownership of anywhere from 15% to 35% of the total loan amount borrowed. The lender then finances the remainder and in return receives a guarantee from the government on a portion of the loan — currently about 75% to 85% up to $1.5 million, depending on the loan's size.
What it costs
Interest rates are typically higher than prime, but by no more than 2.25 to 4.75 percentage points, depending on the loan's term and size. There are also fees: the primary one is the guarantee fee, which is applied to the portion of a loan that the SBA guarantees for lenders. The fee rises with the loan amount: for instance, loans up to $150,000, currently cost 2% (i.e. $1,700 on a $100,000 loan with an 85% guarantee). Between $150,000 and $700,000, the fee rises to 3%; on loans above that it increases to 3.5%.
SBA 504 Term Loan
A less-utilized program than the 7(a), the 504 is intended to serve as an economic-development catalyst, so funds are narrowly restricted to expenditures that will ignite job creation or retention. The maximum loan amount varies, rising if a project meets certain public-policy or manufacturing goals. The size of a project can range from roughly $200,000 to $10 million.
What it's for
This type of loan is Ideal for long-term, fixed-rate financing for major fixed assets such as land, buildings and machinery. Funds can be used for such investments as parking lots, landscaping and construction of new facilities, as well as renovations or modernizations of existing ones. Qualifying businesses must have a tangible net worth of no more than $7 million and average net income of no more than $2.5 million for the preceding two years.
How to get one
In combination with a commercial lender borrowers work with a Certified Development Company -- a nonprofit company that works with the SBA and private-sector lenders to put the project money together. There are about 270 CDCs nationwide, listed on the SBA's Web site.
Typically, borrowers invest 10% of the total 504-project amount needed. A CDC then lends an additional 40% at a fixed, low interest rate (generally 0.5 to 0.75 percentage point below market pricing) for 10 to 20 years, an amount fully backed by an SBA-guaranteed bond offering. A commercial lender, such as Wells Fargo Bank, then provides the remaining 50% of the money, generally at market rates, taking a senior position (meaning they get first dibs on collateral if the borrower defaults), with no government guarantee.
What it costs
Fees total about 3% of the amount guaranteed by the SBA. One bonus: Small businesses typically put up less of their own money to get a 504 than other loans.
MicroLoan
A little-known instrument that helps a small pool of entrepreneurs obtain funding they couldn't get otherwise because of poor credit and lack of assets.
What it's for
Candidates for MicroLoans are usually firms with five or fewer employees, and the borrowers are often low-income, minority or disabled individuals. The loans max out at $35,000; the average was $13,600 in fiscal 2004.
One important facet of the program: MicroLoans allow applicants to offer up types of collateral that commercial lenders typically reject: earthworms from a fish-bait farmer or a grocery's frozen fish.
How to get one
The loans are made by nonprofit community-based groups that secure funds from the SBA and then pay them back with interest. The nonprofits' staffs — helped by grants from the SBA — support borrowers, helping them navigate the intricacies of payroll taxes and cash flow. There are about 150 of these nonprofit intermediaries nationwide; the SBA's Web site lists their locations. What it costs Rates vary, but because MicroLoan candidates are considered higher risks, the cost is typically several points above prime. They are still cheaper than credit cards, however.
Wells Fargo is the #1 lender to small-business owners nationwide, according to U.S. government Community Reinvestment Act (CRA) data, having lent 85 percent more than its nearest competitor in 2003.
The government data shows that Wells Fargo ranked #1 in lending to small businesses in low-to-moderate income (LMI) neighborhoods for loans less than $1 million. Wells Fargo made more than $4.2 billion in loans for 2003, up 27 percent from 2002, and double that of the 2nd ranked LMI lender, US Bank.
More articles from Wells Fargo
Copyright 2008 Wells Fargo
