Utah business is looking up post-pandemic. According to The Enterprise, three in five Utah small businesses have fully recovered or expect to be fully recovered by September and 40 percent have already returned to pre-pandemic levels.
That said, it doesn’t mean small-business owners aren’t going to be on the lookout for new and additional business loans. Whether just starting a business or looking to expand, there are several different Small Business Administration (SBA) loan programs to help meet a variety of needs — from purchasing heavy machinery to providing working capital to grow.
Some of the most common and widely used loan options are SBA 7(a) loans and SBA 504 loans. Here’s what you need to know:
SBA 7(a) Loans
The SBA designed SBA 7(a) loans to assist small-business owners in obtaining funds to help their businesses with working capital, real estate purchase, inventory and equipment purchase, debt restructure and business acquisition.
SBA 7(a) loans are guaranteed by the SBA by a portion of the amount borrowed. Loans are limited by capping interest rates and loan fees. Borrowers can apply for a 7(a) SBA loan by working directly with an SBA lender and the guarantee from the SBA helps businesses acquire funds, even if they otherwise would not qualify for a conventional product.
Popular Types of SBA 7(a) Loans:
1. Standard and small 7(a) term loans.
• Standard loans max out at $5 million; small loans max out at $350,000.
• The SBA guarantees 85 percent of loan up to $150,000 and 75 percent of loans greater than $150,000.
• Interest rate may be fixed or variable but is capped.
• Terms are up to 10 years for non-real estate and up to 25 years for real estate loans.
• These loans fully amortize with no balloon payments.
• Guarantee fees and lender fees can be financed with loan proceeds.
• These loans can be used for permanent working capital, inventory and equipment purchase, debt refinance, tenant improvements, business acquisition and real estate purchase.
• All available collateral will be required to be pledged until the 7(a) is fully collateralized.
2. SBA Express loans.
• These loans max out at $350,000. On Oct. 1, 2021, they will be permanently changed to $500,000.
• The SBA will guarantee up to 50 percent of the loan.
• These loans are lines of credit or term loans designed for businesses that need a short turnaround.
• Can be used as a revolving line of credit for up to seven years with maturity extensions permitted at the outset.
Lenders may use their existing collateral policy for Express loans.
3. SBA Export Express loans.
• Similar features of the SBA Express loan.
• This program is for exporters who need lines of credit.
• This also has an expedited turnaround time.
4. CAPlines.
• CAPlines follow the general outline of the Standard 7(a) loans.
• The SBA will guarantee 75 percent of the loan.
• CAPlines extend lines of credit to meet short-term and cyclical working capital needs. This is not a term loan and required to revolve like a line of credit.
• CAPlines last for up to 10 years and are designed to help with general and builder contracts, seasonal resources and recurring working capital needs.
Who Qualifies for an SBA 7(a) Loan?
There is a list of requirements that a business must meet in order to qualify but some of the larger qualifications are that businesses must be defined as a small business by the SBA and operate in the United States. The size standards are measured by number of employees or annual revenue, depending upon the industry in which the business operates. Businesses must also have attempted to use other financial resources such as a conventional loan before applying for an SBA loan. Borrowers are encouraged to start working directly with their SBA lenders to verify if they qualify for an SBA loan.
Most for-profit types of small business are eligible for an SBA 7(a) loan except for businesses that deal with illegal activities, gambling and any kind of investment or lending activity. Nonprofits, charities and religious groups are not eligible.
IMPORTANT NOTE: Temporary modification to the 7(a) program until Sept. 30, 2021: On Jan. 27, the SBA issued a notice modifying the 7(a) loan program due to the Economic Aid Act, including temporary higher guaranty percentages and fee reductions on eligible 7(a) loans, and an increase in the maximum SBA Express loan amount. 7(a) loans approved through Sept. 30, 2021, are increased up to 90 percent guarantee and SBA guaranty fee is reduced to zero subject to the availability of funds. Express SBA loans are also increased to $1 million through Sept. 30. Maximum loan amount cannot exceed $4,166,666 in order to receive a 90 percent guarantee.
SBA 504 Loans
SBA 504 loans are designed to support a community’s economic growth development. They offer financial support for acquiring fixed assets for expansion or modernization, such as equipment or real estate.
The maximum amount that can be granted is $5 million to $5.5 million depending on the business’ project. The most common structure for a 504 loan is the 50 percent, 40 percent, 10 percent way. This means that 50 percent of the costs are financed by a financial institution, 40 percent are financed by the SBA and the borrower provides a 10 percent down payment.
Who Qualifies for an SBA 504 Loan?
Similar to a 7(a) loan, there is a list of qualifications that must be met and a business must operate as a for-profit entity that operates in the United States and meets the SBA size guidelines for a small business. Those guidelines are defined as a company having tangible net worth of less than $15 million and an average net income of less than $5 million after federal income taxes for the two years leading up to the application. A business must also have qualified management experience; a business plan that’s been deemed feasible; not be engaged in nonprofit, passive or speculative activities; and must show good character with the ability to repay the loan.
IMPORTANT NOTE: Temporary modification to the 504 program until Sept. 30, 2021: The SBA has offered fee reductions for new 504 loans approved from Dec. 27, 2020, through Sept. 30, 2021. These reductions waive 0.5 percent Third Party Lender Participation Fee on loan in senior lien position in 504 project and waive 1.5 percent CDC processing fee (in debenture pricing.)
With favorable interest rates, now may be an ideal time for Utah business owners to consider an SBA loan. Contacting a local financial institution is the fastest and easiest route to take when beginning to explore your options to ensure you choose what is best for you and your small business.
Ryan H. Jones is the executive vice president and chief lending officer at Alta Bank in American Fork. With 18 years of banking experience, he is a member of the bank’s Executive Management Committee.