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Small Business Administration (SBA) Loans

July 7, 2017

A guide to what your business needs to know

Contributed by Independent Bank

Since it was founded in 1953, the United States Small Business Administration, or SBA, has worked to help small business owners succeed. It does so through advocacy, training, and contracting programs, but perhaps the most important tool it provides is financial access. SBA loans help small business owners obtain the money they need to open, maintain, or grow their companies. Understanding how these loans work can be vital for you as you operate your small business.

The Basics
Most importantly, the SBA does not itself grant or administer loans. Rather, it guarantees loans that private banks and lenders write. If the business defaults on the loan, the SBA pays a portion of the amount due. This allows lenders to write loans that carry a little more risk, which makes financing available to a broader array of small businesses than would otherwise be available.

In exchange for its guarantee on these loans, the SBA crafts the standards for the loans to be written. The result is that many entrepreneurs who may not qualify for a traditional loan have the ability to open or grow their businesses in pursuit of the American dream. The loans are designed specifically for business owners unable to obtain alternative financing. The SBA is focused not on providing more options to people, but rather on expanding opportunity to more entrepreneurs.

7(a) General SBA Loans
The 7(a) loan is the most common type of SBA loan. These loans provide flexible options for small business owners, including the following permitted uses:

  • Long-term working capital for accounts payable or operational expenses
  • Short-term working capital for financing or seasonal needs
  • Revolving credit based on the value of inventory and receivables
  • Equipment purchases
  • Real estate purchases
  • Building construction or renovation
  • Establishing or acquiring a new business
  • Refinancing current debt

Some limitations and restrictions apply to each of these. In particular, you need to demonstrate a sound business purpose before you can obtain 7(a) SBA loans. Still, if the money is part of a strategy to build or grow your business, these loans can help open up opportunities for you that you may not otherwise find available.

504 SBA Loans
Where 7(a) loans provide broad options, the 504 loan is specifically for real estate and equipment purchases. These specifically apply to the following:

  • Real estate purchases, including building purchases
  • Improvements to existing real estate
  • Construction of new facilities
  • Renovation of current facilities
  • Long-term equipment and machinery purchases

If you have broader or recurring needs, the 7(a) loan will make more sense. For specific purchases that will let you open or grow, though, a 504 loan can help.

Serving Small Business Needs
For small business owners unable to get traditional financing, SBA loans can create opportunity. As with any government program, you will need to meet specific guidelines and eligibility requirements with your business. If you do, these programs can open new paths for your business.

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