What you need to know about SBA loans
Do you dream about owning your own business? A bakery? Your own non-profit? A wine-delivery service? (Hey, we can dream.) You’re not alone. Women launch 1,100 new businesses every day. They now own 36 percent of all businesses in the U.S. — and these businesses employ 7.9 million and generate $1.4 trillion in revenues annually.
So, ready to take the plunge? Here’s what you need to know about Small Business Administration loans — and how the new administration might affect you.
In February, Trump tapped Linda McMahon, a former wrestling entertainment executive, as head of the the SBA.
While it’s too soon to tell whether the former CEO of World Wrestling Entertainment will make sweeping changes at the SBA, it’s unlikely that the number of loans the agency guarantees to business owners will decrease.
With a focus on building business and creating jobs, President Trump’s administration is expected to push policies that will help businesses, and backing business loans to help small businesses grow fits that agenda.
“All SBA administrators bring their personal style and focus to the administration, but much of the SBA’s work is set out by statute and regulation, so the substance of [its work] will not alter with a change of leadership,” says Rob Wilson, CEO of business lender C7a.
Because SBA loans are backed by the U.S. government, they present less risk to the lender and, as a result, may be available to companies that are too new to qualify for traditional financing or don’t have a lot of valuable collateral to secure the loans. Here’s what you need to know about the current market for SBA lending.
Types of Loans
The 7(a) loan program, the SBA’s most common loan program, is designed to provide funding for small businesses that are unable to access it elsewhere, either due to lack of collateral or borrowing history.
“There seems to be general agreement, both in Washington, D.C., and on Main Streets around the country, that the SBA’s flagship 7(a) program is important to small business and the economy,” Wilson says.
“There seems to be broad consensus that the 7(a) program should continue at its current levels of $28 billion annually, and keep working to fulfill its original intent: to make credit available to viable business unable to access it elsewhere on reasonable terms,” he continues.
Another type of SBA loan is the 504 program, intended to help a business owner purchase a capital asset, like a building or expensive equipment. Because it was designed as an economic development program, the projects must produce or retain jobs or accomplish some other societal good such as providing development to a declining area or supporting a minority- or woman-owned business.
Because of its focus on job growth, the 504 may get more attention in the coming years, says Pat MacKrell, CEO of the New York Business Development Corporation, which provides SBA loans. The SBA also offers microloans and disaster loans.
With the new administration, “my sense is that there may be more emphasis on the SBA 504 program because to secure loans through that program, you have to demonstrate that you will create or retain jobs,” MacKrell says.
“Throughout the campaign, the Trump administration was focused on job creation, so the qualifications for 504 loans are ideal for meeting that goal,” he says.
The 504 loan program allows business owners to purchase real estate or equipment with just 10 percent down, as opposed to the 20 percent or 25 percent required by traditional loans. In addition, these loans offer long-term, fixed-rate financing. “The idea is that the business will retain more of its working capital to create more jobs,” MacKrell says.
How to Apply
If your business seems to be a fit for an SBA loan, the application process is not much different from applying for other types of commercial loans. You’ll still have to provide financials for your business, and you may have to use personal property, such as your home, as collateral.
But for early-stage businesses that don’t have a lot of revenue yet, SBA lenders are often able to work with strong business plans that show how the loan will help you produce the revenue to pay it off, MacKrell explains.
“You can work with a professional to develop a business plan to show, for instance, that when you get the loan and purchase a new piece of equipment, you’ll be able to accept extra business that you’re now turning down,” MacKrell explains. “A good plan can show how the loan will help provide revenue growth, which will offer cash flow to repay the loan.”
Because this type of loan requires “thoughtful underwriting,” the process can take a while, Wilson says. Be prepared to be patient and willing to learn—there’s no substitute for an in-depth understanding of your business financial information and ability to organize and present it.
“At the end of the day, everyone has the same goal: To have the loan to be repaid [by] the business’ cash flow,” Wilson says. “The reward for the effort is access to capital and better terms than borrowers would get from other alternative sources.”