SBA’S 7(A) LOAN PROGRAM - AN UNTAPPED SOURCE OF CAPITAL FOR YOUR BUSINESS? SBA’s 7(a) Loan Program - an Untapped Source of Capital for Your Business? For small businesses that need a source of financing, the Small Business Administration offer guaranteed financing for a variety of general business purposes through its 7(a) Loan program. This is the most fundamental and widely used of all SBA business loan programs. The 7(a) Loan Program is SBA’s principal program for assisting entrepreneurs who want to start, expand or acquire small business. Key Benefits of Obtaining a 7(a) Loan 7(a) Loans offer flexibility in that they can be used for any valid business purpose. Plus, recent legislation has enabled larger businesses to obtain loans through the 7(a) program. The 7(a) is one of the few commercial loans available for those who need financing but lack sufficient down payment money or equity. For some types of businesses, 7(a) loans offer up to 100% loan to value. These include medical and dental practices, veterinary clinics, independent pharmacies, and funeral homes. The 7(a) program is also flexible regarding the down payment source; it allows gifts from family members or borrowed funds using another asset (i.e. a home equity line) as collateral. However, you will need to prove your ability to repay outside of revenue from the business you wish to purchase. Acceptable sources could be another business you own, your spouse’s income, or income from your own employment. Potential Drawbacks SBA loans cannot be used for these purposes: • 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 effect 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 for the business's continuance until the loan supported by SBA is disbursed • To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow • For a non-sound business purpose Important Facts about the 7(a) Loan Program SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default. Proceeds from the 7(a) loan program can be used for the following purposes: • To purchase land or buildings, to pay for new construction or to expand or remodel existing facilities • To purchase office furniture and fixtures, machinery, equipment, materials , or business supplies • Long term working capital, including the purchase of inventory and/or the payment of accounts payable • Short term working capital needs, including construction financing, seasonal financing, contract performance, and export production • Financing against existing inventory and receivable (under specified conditions) • To refinance an existing business debt that is not already structured with reasonable terms and conditions • To purchase an existing business If you’re not certain whether your projected use of funds fits the above criteria, check with your SBA approved lender. 7 Questions to Ask when Comparing Lenders To begin the process, find a bank or lending institution that participates in SBA programs. SBA loan applications are structured to meet SBA requirements, so that the loan is eligible for an SBA guarantee. This guarantee represents the portion of the loan that SBA will repay to the lender if you default on your loan payments. A helpful strategy when evaluating business service providers is to check references thoroughly. Try to obtain at least three references from each lending company you’re considering. If possible, these should be companies similar to yours in size as well as industry. Contact each reference and ask questions such as: 1. Did the lending agent take time to answer your questions and learn about your business? 2. Were you given adequate assistance through the application process? 3. Did you get the right type of equipment lease agreement for your needs? 4. Did the company work with you through any challenges in making payments? 5. Do you feel you can depend on this lending company as a trusted partner? 6. Do you feel that you were always treated with fairness? 7. Would you use this lending company in the future? 9 Mistakes to Avoid When Applying for a Business Loan 1. Not being prepared with a business plan. Even when not applying for a loan, it's wise to have a business plan to help keep your business running smoothly. But a good business plan is a basic essential for the loan application process. Lenders will want to know how you plan to operate your business, and that you are capable of reaching the financial goals you have projected for the business. Include all financial data at your disposal to support your plan. 2. Not shopping around before choosing a lender. Investigate the loan programs offered through credit unions and other sources in addition to your local bank. 3. Not having the required financial documentation. Whether applying for a business or personal loan, take the time to get your finances in order so you can present the proper documentation to the lender. 4. Not being aware of your credit rating. Obtain your credit history and scores from the three main credit reporting agencies so you have an idea of the type of loan you can qualify for. If your credit report has errors it may be worth the effort to clear them up before proceeding with your loan application. 5. Not indicating what the loan will be used for. Lenders will want details regarding how the money will be used. They also want assurance that you know exactly what your business needs are and how the loan will help meet those needs. 6. Signing the loan agreement without carefully studying the terms. Once you find out you've been approved, it can be tempting to sign without reading the agreement. But take the time to go over the details carefully and ask for clarification of any points you don't understand completely. 7. Not locking in a good rate. When you do find a good rate, don't hesitate to lock it in before it has a chance to go up. Waiting for interest rates to drop further could prove costly. 8. Making changes in your business. Lenders look for stability in business operations, so significant changes in personnel, or in the way you run your business may be cause for concern. 9. Lack of equity in the project. Seeing that you have personally invested in your business project will give lenders more confidence in taking on the risk; you will be more likely to work hard for success when your personal assets are also involved. 3 Key Qualities to Look for In a Lender Take the following factors into consideration when looking for the right commercial lender a 504 Loan: • Rate: Be sure that you understand not only what the current rate amount is, but also what kind of future rate you will be getting so that you can anticipate costs down the road. • Reputation: The reputation of the commercial lender is very important. Look for a lender that has a track record of credibility will work with you in a favorable way if there comes a time when you have difficulty making payments. Search the Better Business Bureau records and Google for information about a particular company and any complaints that may have been filed against that company. • Loan Amount: Depending on the credit history of the business and the key players, the amount of the loan that you will be able to get may vary by mortgage lender. Therefore, you will want to preauthorize the loan prior to looking for property or equipment to purchase. Making Your Final Selection There are hundreds of commercial lenders across the country. Finding the right lender for your business needs is a time consuming process. It involves doing plenty of research into rates, fees, and the reputation of each lender. The experts at InsideUp have a proven track record for matching businesses with the right vendors for their needs. We have pre-screened, top commercial loan vendors who are willing to compete for your business with highly competitive quotes. We provide this service at no cost or obligation to you. Hundreds of businesses have successfully used our service to find quality service providers who offer significant pricing advantages. Glossary of Key Terms A/P Accounts Payable A/R Accounts Receivable ACH Automated Clearing House Agency Guaranty A commercial loan written with a guaranty of a private or municipal agency guarantying the loan payment to the lending institution, like the Small Business Administration (SBA) Appraised Value The value placed on an item, product or business by an appraiser recognized for expertise in a particular field Asset The entire property of a person, association, corporation or estate applicable or subject to the payment of debts C Corporation A separate legal entity once it is formed, so it must file its own taxes and be responsible for its dealings. It can have unlimited numbers of shareholders, and those shareholders can be any kind of legal entity. Additionally, since corporations are taxed on their income and shareholders have to claim dividends as taxable income themselves, shareholders of a "C" corporation are double taxed on their dividend income. CFFO Cash Flow from Operations CPA Certified Public Accountant CRA Community Reinvestment Act Cash Flow The movement of money into and out of your business Cash Flow Statement An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment on financing are paid Certified Development Company A non-profit corporation set up to contribute to the economic development of its community Collateral Something of value – securities, evidence of deposit or other property – pledged to support the repayment of an obligation Commercial Mortgage A mortgage loan written for a business purpose with a building used as collateral Commercial Paper Unsecured promissory notes of large corporations Credit Time allowed for the payment of goods or services sold on trust as well as confidence in the buyer's ability and intention to fulfill their financial obligations Creditor The lender of the funds, to whom someone owes a loan DDA Demand Deposit Account ECOA Equal Credit Opportunity Act Equity An accounting term used to describe the net investment of owners or stockholders in a business. Under the accounting equation, equity also represents the result of assets less liabilities. General Accepted Accounting Principles General Partnerships A form of business entity in which two or more co-owners engage in business-for-profit. For the most part, the partners own the business assets together and are personally liable for business debts. IRA Individual Retirement Account IRS Internal Revenue Service ISO Independent Servicing Organization Joint Venture Is a general partnership typically formed to undertake a particular business transaction or project rather than one intended to continue indefinitely. Most often, joint ventures are used in real estate matters where two or more persons undertake to develop a specific piece of real property. Liabilities Debt owed by the company, such as bank loans or accounts payable Limited Liability Company (LLC) A distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation (earnings are taxed only once) Limited Partnership One or more "general" partners run the business while "limited" partners contribute capital and share in the profits. General partners remain personally liable for partnership debts and risks while limited partners incur no liability with respect to partnership obligations beyond their capital. Line of Credit A revolving credit where the funds can be re-used after repayment, usually for short durations Marketable Securities Stocks or bonds sold on an open market, like the New York Stock Exchange (NYSE), for which there is a readily available sale Maturity The date on which a loan becomes due Net Worth Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth) Non-Profit A corporation that cannot issue shares and cannot pay dividends. In addition, under the Federal Tax Code Section 501 (c)(3), a non-profit corporation is eligible for certain federal and state tax exemptions and, upon dissolution, must distribute its remaining assets to another non-profit group. S Corporation Much like a "C" corporation in that it is also its own legal entity, protects its shareholders from legal liability, and requires a certain amount of yearly maintenance. However, an "S" corporation allows shareholders to claim their share of the corporation's income directly on their personal tax return, avoiding a double tax situation. However, an "S" corporation is generally limited in the amount of shareholders. SCORE (Service Corps of Retired Executives) 10,500-member volunteer association sponsored by the Small Business Administration (SBA). SCORE matches volunteer business-management counselors with present prospective small business owners in need of expert advice. Small Business Administration (SBA) A governmental agency that aids, counsels, assists, and protects the interests of small business concerns, and advocates on their behalf within the government Sole Proprietor A sole proprietor is not a separate entity itself. A sole proprietor directly owns the business and is directly responsible for its debts. Term Loan A loan written for a specific term, e.g., 60 months, calling for a monthly principal and interest payments Time Loan A loan written for a set time period, usually with all principal and interest due at maturity . SBA’S 7(A) LOAN PROGRAM - AN UNTAPPED SOURCE OF CAPITAL FOR YOUR BUSINESS? SBA’s 7(a) Loan Program - an Untapped Source of Capital for Your Business? For small businesses that. Partnerships A form of business entity in which two or more co-owners engage in business -for- profit. For the most part, the partners own the business assets together and are personally liable for business. a proven track record for matching businesses with the right vendors for their needs. We have pre-screened, top commercial loan vendors who are willing to compete for your business with highly