One of the important roles that a CFO plays is to ensure that a business is adequately funded often times through a small business lending program such as SBA loans. This requires not only anticipating the need, but understanding what is driving the need so that the appropriate type of funding can be identified and arranged for. In some instances it makes sense to get this funding through what are referred to as SBA loans and while they are referred to as SBA loans they are actually originated through a bank. In this post I am going to go over the two types of SBA loans currently available.
The two SBA loans have several different characteristics and serve different purposes.
SBA 504 Loan: Used for real estate and equipment, limited to $5M (SBA portion), usually 10-20 year term, Interest rate is either fixed or variable and is prime+ 2-4%, fees are around3%, requires collateral and banks and CDCs source. As a quick aside CDC stands for Certified Development Company which a non-profit organizations that are certified by the SBA to facilitate financing for 504 loans. Bank and SBA participate together for up to 90% of the total amount.
SBA 7(a) Loan: Used for working capital and business expansion, limited to $5M, usually 7-20 year term, Interest rate is variable and is prime+ 1-2.5%, fees are 2-3%, requires collateral and banks source. Bank lends, SBA guarantees. Typically the loan represents 75-90% of total need with owner putting up the rest.
In summary both are long term debt and the SBA doesn’t lend the money in both cases, although it does guarantee the loans. An SBA Guarantee makes it easier for banks to lend money through the SBA loan program to qualified businesses.
The Shared Finance Center provides virtual accounting and CFO services to small businesses. We are familiar with the SBA loan program and how to streamline the process and increase the speed with which the loan is funded from initial interest to cash being accessible.
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