How do Small Business Administration (SBA) loans work?

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This lesson I want to talk about talk about a very popular topic, which are SBA loans or Small Business Administration loans. And what they are is it's important to understand that SBA, Small Business Administration loans are not grants, they are not free money. There are the opportunities to get grants for small business ventures out there. We're not talking about that. In this lesson, I'm talking about Small Business Administration loans. And these are loans that are facilitated by the SBA, which is a government entity.

And the whole purpose of these loans is to encourage lenders to make more loans to small business owners. Again, they're not a grant, they're not free money. What's happening with the Small Business Administration loan is the funds that are being provided by the lender are guaranteed by the government. Okay, and what that means is, these loans most of the SBA loans are made through what is called a preferred lender, partner. And those preferred lenders are what you would imagine is your large banks in the US like your Wells Fargo's, US Bank, Celtic bank, others are all SBA lenders, even some smaller lenders make SBA loans. What happens is if they're a preferred lender, the SBA has approved that lender to go ahead and make a decision of whether or not they will approve the loan, have their own underwriting guidelines.

So the lender will take your application and make up their own mind if they're willing to make the loan. If they're a preferred lender, and then they go to the SBA and ask for the guarantee. So the SBA itself in many instances is not actually making the loan the lender This is very important to understand. The lender is making the loan. The SBA is merely guaranteeing the loan itself and they usually facilitate these preferred partners. Although the SBA does make some of their own loans do what's called their micro loan program, but for today's purposes, this lesson, understand that the essence VA loans are made through other lenders.

And all the SBA is doing is guaranteeing the loan itself. There's a couple of key programs that the SBA offers. The main one is called the seven a, and the loan amount can go up to I put an X in there, because that depends on the program. That year that's been approved, oftentimes is up to three to 5 million in the SBA seven a program. funds can be used for a wide variety of things. You can use them for working capital, you can use it to buy real estate, you can use it to buy equipment, you can use it for all kinds of things.

And there are some common loan terms that are often what happens with the SBA loans is you're typically looking at anywhere between five, seven and 10 year terms, not amortizations go back to that lesson for the difference. But the SBA programs are usually five, seven or 10 year terms depending on the type of collateral that you're offering. And the guarantee to the lender can be up to nine D percent through the 70 program. Now what that means is that, I'm sorry, can be 75%. So what that means is that the SBA, the government is guaranteeing the lender that if you default on $100,000, that that lender is going to get $75,000 back. So you can see why the guarantee encourages lenders to make more loans because they know they're going to recoup some of those funds, if the if the money is lost.

And what the SBA program does not do is make a bad loan, a good loan, but what it will do is make a loan that the lender is sort of uncertain about maybe they want to do the loan, but there's some things that concern them and they would normally decline it because it's in the gray area. When those types of loans the SBA guarantee will encourage them to make the loan because they're going to be able to recoup some funds no matter what. Under the seven eight program. There's also a program called the Express program and this is for loans that are under $350,000 and do this program. The lender doesn't even ask for permission to make the loan. But through the SBA, they actually do it themselves, and then report the loan to the SBA.

Again, that has to be done through a preferred lender. So if you're going for less than $350,000, ask the lender if they do if they participate in SBA loans, and if they do, do they participate in the Express program. The other program is called 504. This is facilitated through what's called as Community Development Center, a CDC. And the main difference here is these loans are for much larger loans probably around anywhere between 10 million and north of 10 million. And these funds can be used for the same types of things that seven eight programs can be used for the loan terms are the same.

And the guarantee here through the five before program is actually 50%. And the reason is, is because the way that works is you will have to fund 10% of whatever the need is the lender, I'm sorry, the lender will make 50% of the loan and then the five before program makes the other 40% So the main difference here with the 504 program is with a seven a program. If you're a preferred lender, there isn't as much of a process involved, particularly if it's through the Express program, the loan just follows the lenders guidelines, and then it's done with the 504. There's a committee that has to review the loan and accept it, as well as getting the lender to approve it. So follow for loans can take a bit longer to get accomplished. There's still a great program to think about, particularly in your area, if you have a CDC who makes file before loans, they, therefore those much larger loans, and there's still a guarantee there, which encourages the lenders to make that loan.

So, again, just to reiterate, how do you apply start with a preferred lender call around if you're looking for an SBA loan, I highly encourage you to start with that preferred lender, because the loan decisions starts with that lender themselves. And then they go to the SBA. Then they look at the SBA guidelines if the loan qualified files for the SBA Express program again, that's $350,000 or less than the lender doesn't even ask permission from the SBA to make the loan. They just go ahead and approve it using your own guidelines and notify the SBA loan that I happen. The SBA program is really really good through the Express, it's less than $350,000. Again, they approve it themselves, as long as the loan matches their guidelines.

The SBA doesn't have to review the loan. Other than one key point here. What happens is the lender has to go through something called a Tran and then just verify that the borrower's are not criminals basically, is what happens they enter your information, and as long as you haven't committed any serious crimes, if the lender is approving the loan, the SBA approves the loan. So the best time to use an SBA loan is when the lender is on the fence when they're not sure about whether or not they're willing to make the loan. The SBA guarantee oftentimes will encourage them to make the loan again, it doesn't make a bad loan good. It just helps the lender when they're uncertain.

About it, if you have limited collateral to offer that guarantee sort of acts as collateral in some in some instances, so the SBA is another good option then. And then finally, a good time to use the SBA loans is when your loan length of the loan needs to be extended. In some instances without an SBA guarantee, the lender will only offer a smaller term, maybe they're requiring you to pay back this loan in five years. Whereas when they add the SBA guarantee, they may be able to, excuse me, they may be able to push it out to 10 years. So are there any negatives to SBA loans? Not really, again, the 504 can take a little bit longer than anticipated.

But the two main issues to be aware of is that the time of approval since a second party can be involved can be longer, and that the SBA does have their own fee structure. So if the bank is charging you a 1% loan origination, the SBA may be charging their own fee as well.

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