SBA Loans for Debt Financing

It may surprise you to know the Small Business Administration (SBA) doesn’t actually lend money to small businesses. Rather, it partners with lending institutions to offer capital to small businesses that are unable to secure a loan without the SBA’s backing. It guarantees the loan (between 50% to 90%) so the bank has a much lower risk when working with small business.

How can you get help from the SBA?

First, let’s consider what SBA calls a small business. It’s definition takes into account the average annual receipts of the business for the given industry and/or the number of employees. For more details you can refer to SBA’s small business size standards. In addition, Fundera offers a very helpful breakdown by industry type. If your business doesn’t fit one of SBA’s types, your bankers may be able to use a benchmark to compare your business with similar ones in your industry to determine whether your business is a small business. For example, Off The Grid, a company that organizes food trucks events, was able to get a SBA guaranteed working capital loan.

What kind of loan programs does SBA have?

The SBA separates loans into two types: working capital and fixed assets loans.

Working capital loans can be used to support and expand your business, refinance your current debt, acquire another business, or start a franchise. SBA’s working capital loan program is called 7(a). Here’s some info about 7(a) loans:

      • The maximum 7(a) loan amount is $5 million.
      • It requires 10% down payment by the business owner.
      • The SBA guarantee 50% to 90% of the loan depending on the type and amount of the loan.
      • Most common business benefiting from this loan are manufacturers, restaurants, medical specialists’ offices, auto repair shops, hotels, and franchise businesses.
      • The SBA charges a one-time upfront guarantee fee of 2%-3.75%.
      • The interest rate can be fixed or variable, although most lenders like to use the fixed interest rate.
      • The SBA sets up the maximum allowable interest rate, however, to be competitive lenders normally offers rates that are lower than the allowed maximum rate. For example, at the time of this blog, most of the banks are charging prime+2.75%, even though the maximum allowable rate is prime+5%.

Fixed assets loans are different. If you seek capital to buy real estate, make real estate renovation, or purchase equipment with useful life exceeding ten years, you should also consider SBA’s program for fixed asset loans, called CDC/504 loans (CDC stands for Certified Development Company – more on this below). For fixed asset loans up to $5m you can use 7(a) or 504, but if the loan amount is above $5m, you can only use the SBA 504 loan program.

Here is some information about CDC/504 loans:

      • For real estate loans, the real estate has to be at least 51% owner-occupied.
      • The borrower’s down payment can be as low as 10%.
      • In a CDC /504 loan, the borrower will have two loans: one with a commercial bank and another one with the CDC. The Bank’s loan has the first lien position, which reduces the bank’s risk and gives it an incentive to cover part of the loan. Because the collateral is often not enough to cover the risk for the entire amount of the loan, the banks don’t offer the entire remaining amount of the loan. That is why a CDC needs to cover the remaining. CDC’s loan is 100% guaranteed by the SBA, but that portion cannot exceed 40% of the loan, and the dollar amount cannot exceed $5,000,000 (or $5,500,000 for manufacturing and green energy businesses).
      • The interest rate is fixed for 10, 20 or 25 years. For example, a $3 million dollars loan may be structured as follow:
Borrower's Down Payment 10%$ 300,000
Commercial Banker's Portion 50%$ 1,500,000
CDC Portion 40%$ 1,200,000
Total$ 3,000,000

Under this program, the loan amount can be much larger than $5 million, as long as the CDC portion of the loan (which is SBA guaranteed) is not more than $5 million.

Here is an example a $12.5m loan:

Owners Down Payment 10%$ 1,250,000
Commercial Banker's Portion 50%$ 6,250,000
CDC Portion 40%$ 5,000,000
Total$ 12,500,000

If the borrower pays a 30% down-payment, then the loan size could be as large as $25 million. Note that if the commercial bank is willing to finance more than the 50% of the loan amount, the owner could pay less down payment. For example:

Owners Down Payment 30%$ 7,500,000
3rd Party Bank Portion 50%$ 12,500,000
CDC Portion 20%$ 5,000,000
Total$ 25,000,000

If you are considering an SBA loan to purchase owner- occupied commercial real estate and the cost is less than $5 million, you should do a comparison between the 7(a) loan and the CDC/504 loan for the term, interest rate and fee. The table published by NADCO provides the detail you need to compare the various type of loans. Many large banks can do this comparison for you.

The interest rate on the CDC portion is fixed and most CDCs publish their rates on their website. For example, at the time of this blog the top SBA CDC lender in the bay area, TMC financing, offers a rate of about 4.5% on its website.The maximum interest rate for the commercial bank portion for the loan is prime+6%. Since the prime rate is 5.5% as of 4/1/2019, the commercial bank rate could be anywhere between 5.5% to 11.5%. Similar to 7(a) loan programs, most banks will not charge the maximum allowable rate to remain competitive in the marketplace.

Regardless of what kind of loan you seek, even for non-SBA ones, bankers look at the what they normally call the Five Cs:

      • Capability to repay – cash flow, you have the monthly profit to repay the loan;
      • Capital – down payment, most lenders require 20% to 30% for non-SBA loan, and 10% for SBA guaranteed loans;
      • Capable Management – years in business or your experience with a startup;.
      • Character and Credit – business and personal Credit Score and personal criminal history and ;
      • Collateral – business and personal.

It’s best to work with your CFO and tax accountant to have your financial records ready, which may include the past three years of tax returns and financial statements and financial projections for one to three years after you got the loan, your business plan, and the 5 Cs. You can call us to help you prepare your loan package. Many banks specialize in lending to certain businesses. CFO2GO can also identify the right bank (or CDC) for your business loans so you won’t waste your time with banks unfamiliar with your industry.



Tong Qin co-leads the International Practice, bringing to clients a deep experience and knowledge of international business within and between the Asian basin and the United States. Tong helps small and big companies to design and implement financial controls needed for compliance with various government regulations, enabling management to focus on opportunities for growth instead of dealing with regulatory concerns.

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