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SBA Loan

The Small Business Administration (SBA) has several loan programs. The most common is the 7a program which is usually what is referred to an SBA loan. The SBA doesn't actually lend to businesses directly. The loan is done through a financial institution, usually a bank, and the SBA guarantees repayment of up to 75% of the loan.

The SBA Loan is meant to encourage development of small business and because the bank is only at risk for 25% of the loan amount, underwriting standards are less demanding than for a regular bank loan. The underwriting process is similar to a bank loan with the added step that you must qualify for a SBA loan. Certain businesses, such as those engaged in lending, are not eligible. There is a pilot program for loans under $250,000 where businesses can prequalify for a SBA Loan. A SCORE counselor can assist you with the process at no charge, you can request a counselor at www.scorechicago.org. A list of institutions participating in the SBA program can be found at www.sba.gov/il/il_ilclp.html.

The rate on an SBA loan is capped by the SBA and varies with loan type but within these parameters the pricing is established by the bank. One of the disadvantages of SBA Loans is the high up front cost. The SBA charges a fee of 2.5-3.5% of the loan amount to guarantee the loan, which the bank passes on to the borrower. In many cases, a SBA Loan can help a business grow and after the business has built a history, they can qualify for traditional funding on more favorable terms. It is rare that a bank will issue any loan, including a SBA loan, to a startup with no history unless there is real estate or other investments such as stocks to use as collateral for the loan.

The SBA also has programs with very favorable terms to businesses that are victims of natural disasters such as hurricanes. Loans are available to fund replacement of damaged property as well as cover operating expenses during periods where there is a loss of revenue. You must be able to document and prove your loss. Unlike the standard SBA loans, this is issued directly by the SBA. Application is done through the Atlanta office. In the event of a natural disaster, visit www.sba.gov for more information.