A banker answers questions about the SBA’s guaranteed loan program @ Franchise Times. Here is a summary:
- When is a SBA loan a good choice for borrowers?
- anytime
- What can I finance with a SBA loan?
- any legitimate business need
- How much down is typical?
- 10%-30% (higher for startups)
- What do I do first?
- write a business plan and see your banker
- What are some basic term guidelines for an SBA 504 and 7a program?
- 7a: These are general small business loans. The term of the loan tends to mirror the use of funds (how long you can amortize the asset, length of equipment loans are based on the life of the equipment). They’re one through the bank but SBA guarantees a portion of the loan.
- 504: These are restricted to expenditures that will spark job creation or retention. Generally used for long-term fixed assets and facilities (not working capital). Max net worth of applicant must be under $7.5 million.
- Can they be used together?
- Yes.
- Can you give me an example of a deal that works with both 7(a) and 504?
- restaurant
- How does a construction loan work?
- Short-term loans that typically require interest-only payments during construction and become due upon completion.
- How is the money I borrow actually disbursed?
- The bank distributes the money as needed and planned. The contractor will submit a draw request monthly to cover the labor and materials for work completed to date.
- How long does the draw approval process take?
- Ideally 3 days
- How long does it take to obtain a construction loan approval?
- No timeframe given
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-715-8115.
Do SBA lenders favor franchises? Do franchisees receive more favorable terms? If you borrowing for a franchise, do I still need a business plan?
Due to cutbacks in federal subsidy, the fees paid by borrowers should be increasing. I have heard many negative experiences with SBA, primarily relating to the extensive paperwork and lengthy approval process. In fairness, I should point out that these difficulties are usually a result of the bank trying to cover itself on the 15% exposure. Many of the larger franchisors have working relationships with loan brokers/lenders, and if that is true in your case I would use the franchisor source. While SBA might look cheaper, I have seen delays that caused the Buyer to lose the deal and I advise Sellers that if the Buyer is using SBA financing, the Seller should insist on a stringent “Time of the Essence” clause backed by a strong money forfeiture.