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SBA Loan

Tags: financing, SBA loans

Comments & Replies: 3     Views:     Post ID:     Comments About This Glossary Term

While the "big box banks" provide SBA loans, business owner and buyers are almost always better served by small regional or local banks, and better still by a loan broker who will "shop around" for the best deal and often get SBA loan approval when the "big banks" won't take the risk. Prospective buyers should check out, or similar resources in order to take advantage of all the options open to them.

Contributor: Business Broker, Northern California
The SBA is the Small Business Administration. This is a Federal Government Agency. It's purpose is not to issue loans to small businesses but to put a structure in place with banks and other lenders that allows them to write loans to buy a business or real estate and underwrite a large percent of the loan for the banks and third party lenders to reduce the amount of loss that may occur if the borrower and the business venture fails. The rules of an SBA loan are complex because the US taxpayer underwrites the large percent of the loan.

It is a unique program to the United States and I don't believe offered in any other country in the world. When a business owner wants to sell their business in another country, they either have to expect all cash from the buyer or accept a mix of cash and seller finance.

A popular source of money borrowed to help fund purchase of a small or mid-sized business is described (not entirely accurately) as an SBA loan. One objective of the Small Business Administration is to aid business buyers needing cash to complete their deals. SBA loans also are important to start-up entrepreneurs and owners planning to expand and hire more employees.

But the term can lead to misunderstandings about the SBA's role in the process by which a business buyer gets cash needed to complete a deal. It's useful to understand that the SBA is not in the business of lending money. Rather, its job is to encourage financial institutions to make those loans by guaranteeing a large portion of each loan (sometimes up to 90%) so that if the borrower is unable to meet the loan obligations the SBA will reimburse the institution for much of its loss.

A bank or other lender can't just decide to offer business loans expecting the SBA to back it up in the case of default. Instead, financial institutions have to be accepted by the Federal agency to be included in its approved lender network.

Approved lenders use some SBA loan application forms and follow its guidelines. One important difference between the SBA loan rules and those of business lenders that don't offer SBA loan programs is the emphasis on sufficient collateral required by institutions not affiliated with the SBA network. If the borrower pledges real estate equity or other assets with a greater value than the loan amount, he or she is more likely to be approved by the non-affiliated lenders. But SBA guidelines put the emphasis on the financial strength of the business and a close match between the borrower's experience and the skills needed to achieve success running the business.

Two popular SBA loan programs include the 504 programs, used to help fund purchase of real estate, such as a warehouse or a lot on which to build manufacturing capability, and the 7(a) Program more commonly used to raise funds for purchasing or expanding an existing business. The"micro loan" (7m) program guarantees much of the lender's exposure for loans up to $50,000, while the larger loans can reach $2 million, half that amount usually guaranteed by the Federal agency.

The SBA supported nearly $30 billion in loans in FY 2013, ending October 31.

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