A common misunderstanding about the SBA loan program is that the SBA makes loans directly to potential business buyers. Instead, the SBA (usually for a small fee) provides a guarantee to potential lenders for the money they lend to small businesses owners. This guarantee protects the lenders interests by promising to pay a portion of the loan back if the business owner defaults on the loan. So when a business applies for an SBA loan, it is actually applying for a commercial loan through an SBA lender (which may be a bank, credit union, or other approved lender).
Essentially, SBA loans reduce the risk to the lender associated with lending money to business owners and entrepreneurs who may not qualify for traditional loans.
SBA loans are frequently used for the acquisition of small businesses by individuals, partnerships, etc. Frequently, you will find that your business broker will have pre-qualified a business acquisition through an SBA lender. This can significantly reduce the uncertainty and time required to secure SBA guaranteed financing and, therefore, make it faster and easier to acquire a business.
The following is largely drawn from the SBA.gov website, which is an invaluable asset to understanding the SBA programs.
What types of loans are available?
There are several types of loans that business can take advantage of, each developed to suit the needs of your business. The 7(a) loan program, for example, can be used for a number of purposes including working capital, revolving funds, equipment purchases, refinancing of existing debt, etc.
SBA also offers export-assistance loans (which grew by 3.7 percent this year) as well as financing for seasonal working capital (CAPLine) or major fixed-assets such as equipment of real estate (CDC/504 loans).
In addition, SBA can help business owners in need of financing to help with disaster recovery. Disaster loans – available to homeowners, renters, businesses of all sizes and private, nonprofit organizations – can be used to repair or replace items that have been damaged or destroyed in a declared disaster including, real estate, personal property, machinery and equipment and inventory and business assets.
If you are looking for smaller loan amounts (under $50,000), consider the Microloan program or the SBA Express program. A subset of the 7(a) loan program, SBA Express is designed for businesses with financing needs up to $350,000. The proceeds can be used to finance a variety of business activities and no collateral is required for loans up to $25,000.
The fees on SBA loans are currently extremely favorable for veterans and are currently set at zero for loans under $150,000.
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