3 Popular SBA Loans: What You Need to Know

Funding your small business or startup raises the lifelong question, how do I do it? Whether you’re in your first year operations or reaching a long-sought after landmark of one, three, five years or more, you’ll still need to continue funding your operations. While retained earnings drive your business to profits, everything from expanding your company to buying new property and technology to handle that growth, loans are one of the most commonly used ways to fund small-business projects.

How to Fund Your Small Business with Three SBA Loans

Small, or Micro Loans

When it comes to borrowing a small amount of money up to $35,000 (this is considered a relatively small amount of money compared to other larger business loans) many people find the 7(m) Microloan program to suit them best.

While the loan itself is currently being quite heatedly debated due to its direct sourcing from the SBA, this loan is perfect for startups. The funds, which max out at $35,000, can be used for pretty much any expense, keeping the loan easy-to-use with little restriction.

However, this loan requires its borrowers to enroll in financial responsibility classes that some find useful while others find to be a waste of their already-strained time as small-business owners. Regardless, this loan has a lot to offer its borrowers with relatively little cramping regulations.

Larger Loan Programs

Unlike the 7(m) Microloan program, programs such as the 7(a) or 504 Loan programs offer much larger amounts of money to companies. These loans can be borrowed in amounts between $250,000 and $1 million offered through subcontracted lenders to reduce the risk of the SBA’s offer to borrowers.

The 7(a) loan is actually one of the most popular loan programs offered, and is offered in many different forms to fit the needs of the borrower. Meanwhile, the 504 program allows small business owners the opportunity to borrow up to $1 million for new assets such as land and equipment. However, this loan is more difficult for many service companies to acquire.

Each of these loans have much more regulated spending and qualification requirements alongside a significant portion of borrower-responsibility when backing the loan.

For more information about small business loans, visit the US Small Business Administration's website. Or, drop us a line with your questions to see how Team VAST can help you decide which loan is best for you.

Banks vs Entrepreneurs – Part Four of Four

You finally did it. You got the loan you needed to build your business, buy a building, have working capital, or whatever. Think you’re done? Think again. Once you have any sort of financing in place, there are a myriad of requirements, reviews and covenants that you have to keep in check indefinitely in order to keep your lender happy. There are also some tricks up the sleeves of the banks that can change the rules once you think you know how to play the game.

Here are some of the most common:

1. Annual loan review

This is like underwriting all over again. Every year. Forever. Or at least until you pay off the loan. You will need to provide your tax returns – both business and personal, your financial statements and probably W-2’s.

The review committee will make sure you still “look good.” Meaning you can still afford their loan. This is different than what you may be used to with your personal mortgage where you basically “set it and forget it.” In a commercial or business loan, you will have a loan review every year and will need to be able to defend your financial results.

2. Compliance with loan covenants

Loan covenants are terms within a loan that say you will do certain things as long as you owe them money. Some common loan covenants are debt coverage ratios and rest periods. Debt coverage is most common with commercial real estate. It means that the rent received less the expenses of the building are at least as much as the debt and usually a multiple of it.

Rest periods come into play with lines of credit. You can use the line throughout the year, but for a set period of usually thirty days each year, the line needs to have a zero balance. This is to prove to the bank that you are in fact using the line for short term working capital needs and not long term financing.

3. Shrinking credit lines

If you are carrying high balances on credit cards and suddenly make a large payment to pay it down, don’t be surprised if the credit card company quickly swoops in and lowers your limit.

Credit card companies are regularly reviewing a company’s credit score and thus their risk. If they feel you have become a more risky client, they can lower your credit limit. If you paid down the balance, so you could make room to make more purchases, this can put a serious dent in your cashflow.

4. The almighty capital call

The annual loan review above is intended to provide the bank with comfort that you are still a viable borrower. If the loan is for real property – land or a building – they will also confirm that the loan is low enough to meet their loan to value requirements.

If you do not provide acceptable responses to their inquiries and if they feel that the value of whatever they have loaned money on has decreased, the lender could send you a capital call. This minor clause in many a loan doc has caused countless businesses into bankruptcy. Savvy developers, experienced retailers, longstanding manufacturers and property owners that would otherwise make payments and carry on have been forced out of business by a several digit deep capital call.