Loan Option to Purchase or Grow a Small Business
If you own a small business, or expect to purchase one soon, you may have heard about the SBA 7(a) Loan Program. This is the Small Business Administration’s (SBA) most popular loan program. Here are some quick facts to help understand if this option is worth exploring.
The 7(a) Program helps banks offer terms up to 7 years for working capital, 10 years for equipment, and 25 years for real estate. The program also provides options for potentially lower down payments and interest rates when compared to other financing options.
The SBA operates to assist small businesses. What do they consider small? Here’s the table they use to determine if a business meets the size requirements. Keep in mind that depending on the industry, the SBA will consider either annual gross receipts reported on tax returns over the past 3 years or the average number of employees over the past 12 months. Gross receipts and employee calculations both include any receipts or employees of affiliate businesses. Also, there is no reduction for part time and temporary employees - they're counted as full employees for the calculation.
The SBA provides a clear list of business that are not eligible, which is linked below. The SBA doesn’t specifically state which businesses are eligible. However, businesses generally need to meet the guidelines below and not be on the list of ineligible businesses.
Operate for profit
Be small, as defined by SBA
Be engaged in, or propose to do business in, the United States or its possessions
Have reasonable invested equity
Use alternative financial resources, including personal assets, before seeking financial assistance
Be able to demonstrate a need for the loan proceeds
Use the funds for a sound business purpose
Not be delinquent on any existing debt obligations to the U.S. government
Use of funds
The SBA 7(a) Loan Program will guarantee loans up to a maximum of $5 million, although the average amount is just under $400,000. The proceeds may be used for any of the following:
To establish a new business or assist in the acquisition, operation or expansion of an existing business
To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory
Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
Revolving funds based on the value of existing inventory and receivables, under special conditions
To purchase equipment, machinery, furniture, fixtures, supplies or materials
To purchase real estate, including land and buildings
To construct a new building or renovate an existing building
To refinance existing business debt, under certain conditions
There are also specific activities the funds may not be used for. These include the following:
To refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing
To affect a partial change of business ownership or a change that will not benefit the business
To permit the reimbursement of funds owed to any owner, including any equity injection or injection of capital to continue the business until the SBA-backed loan is disbursed
To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow
For a purpose that is not considered to be a sound business purpose as determined by SBA
If you are unsure whether or not your anticipated use of funds is allowed, check with your SBA-approved lender
Start the Process
The SBA does not loan money to business owners. Instead, they work directly with banks by providing a guarantee of 75% of the loan amount on loans over $150,000 (85% up to $150,000). This means that the loan process will be slightly different at each bank. Contact your lender directly to find out if the program can help in your situation.
Lenders, feel free to reach out to me with questions regarding the business valuation requirements for the SBA 7(a) Loan Program.
Brandon Mitchell, CVA
Owner/Certified Valuation Analyst
BLM Valuation Services, LLC
About the author: Brandon Mitchell is a Certified Valuation Analyst and owner of BLM Valuation Services, LLC. BLM specializes in certified independent business valuations for SBA lenders and small business owners.