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An overview of SBA loans

Many small business owners will have looked into the Small Business Administration’s (SBA’s) loan program, specifically the most common one applied for – the 7(a) loan. You may not be aware of the other SBA loans available, so we’ll give you a quick overview here.

Types of SBA loan programs

The SBA offers a range of small business loan programs all for different intentions. It’s a wise move to take some time to look at each program to find out if your business qualifies, and to decide whether it’s the right one for you in your current situation.

These alternatives to a standard SBA loan include microloans, CDC/504 loans, disaster loans and other special 7(a) loans.

The Microloan program

Do you need a loan to start up or expand your business? Are you an entrepreneur who only wants a few thousand dollars to get your new business up and running? If so, you might want to consider applying for a microloan through the SBA.

This type of loan works well for online or home-based businesses. Freelancers might also find it helpful for expanding their business. Microloans are considered to be smaller than standard business loans. The SBA microloan program offers loans up to $50,000. The maximum repayment term is six years.

Uses of a microloan

Your business can’t use a microloan to pay off any existing debts or to buy property, but you can use it to finance:

  • Machinery, equipment, furniture or fixtures.
  • Stock or supplies.
  • Working capital.

Applying for a microloan

First, find out if your bank is a preferred SBA lender. All microloans are lent and managed by banks, so you’ll work with your local lender rather than the SBA directly.

Your bank will have its own credit requirements and lending criteria, which will likely include:

  • Some kind of collateral.
  • Your personal guarantee (as the business owner).

You might also have to go through some training and planning requirements before your loan is approved.

The CDC/504 loan program

Do you want to grow or modernize your small business? The SBA’s 504 loan program, also known as a Certified Development Company (CDC) loan, might just be what you’re looking for.

Uses of a CDC/504 loan

The CDC/504 loan was created to help small businesses expand and can be utilized to:

  • Purchase items like real estate and land.
  • Buy long-term machinery and equipment.
  • Make improvements to utilities, parking lots and landscaping.
  • Build new facilities or upgrade, renovate or convert current ones.

However, you won’t be able to use a CDC/504 loan for stock, working capital, repaying or refinancing debt, or investing in rental real estate.

Are you eligible?

To get the CDC/504 loan you’ll have to operate your business for a profit with a realistic business plan and relevant management experience. Before applying for your loan you’ll need to have tried to use other financial resources, including your own personal ones.

Other conditions your business will need to meet include having:

  • A tangible net worth of less than $15 million.
  • An average net income of under $5 million after taxes (over the last two years).

You’ll also have to show you can repay the loan on time from your business’s projected operating cash flow.

Applying for a CDC/504 loan

Certified Development Companies are regulated by the SBA and will work with your bank to provide the CDC/504 loans. Get in touch with your local CDC to apply.

The disaster loan program

Has your business been victim of a natural disaster, causing tough financial times or physical damage? A disaster loan is a low interest, long-term loan that can be used to either replace or repair certain business assets that were destroyed or damaged in a SBA-declared disaster area. The damaged or lost assets could include inventory, machinery, equipment, furniture, fixtures and the business premises. You may even be able to apply for further funds to refinance your existing mortgage or to protect against future damage. You might be able to borrow up to $2 million for a term of up to 30 years.

Types of disaster loans

There are two different kinds of SBA disaster loans offered to businesses. They are the:

  • Business physical disaster loan – if you need to replace or repair property, stock, supplies, equipment or other assets that were damaged in a disaster.
  • Economic injury disaster loan (EIDL) – if you have a small business that’s struggling to meet its financial obligations because of a disaster.

Applying for a disaster loan

To apply for a disaster loan, first register with a Federal Emergency Management Agency (FEMA). You’ll be referred to the SBA for possible financial help. You can then apply online, at a disaster recovery center, or by mail.

Special kinds of 7(a) loan programs

These loans assist businesses that have been impacted by the North American Free Trade Agreement (NAFTA). They also offer financial aid to employee stock ownership plans and help carry out pollution controls.

CAPLines

This program is aimed at helping your small business meet its short-term working capital needs. Up to $5 million can be used to finance:

  • Seasonal working capital.
  • Direct costs of certain construction, service and supply contracts, subcontracts, and purchase orders.
  • Working capital lines of credit with special repayment requirements.
  • Direct costs of commercial and residential construction.

SBA Export loans

The SBA has a number of loan programs specifically aimed at helping your small business to develop or grow its export activities. They are the:

  • Export express loan program – up to $500,000 and the loan approved within 36 hours.
  • Export working capital program (EWCP) – up to $5 million to pay for export transactions.
  • International trade loan program – up to $5 million for working capital and fixed assets.

Rural business loans

If your business is located in a rural area, you might be entitled to the SBA’s rural business loan. You can use this loan for working capital, buildings and real estate, machinery and equipment, and some debt refinancing. SBA loans do come with a lot more rules, forms and regulations than a standard bank loan. If you want to avoid all the potential roadblocks of a SBA loan, a normal bank loan may be a better option.

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