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SBA Small Business Loans Can Be Confusing, Lets Sort Them Out

By J Corey Pierce

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Published: 20Jul2009
Word count: 1075
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Being classified as a small business isn't a bad thing. In fact, it means that you may qualify for a large amount of support from the Small Business Administration or "SBA".

When you are in business for yourself, it is critical to develop a good knowledge base, and that is also what will help you wade through the myriad of small business loans.

So Let's Look at How SBA Loans Work

The first thing you need to understand is that you as a business owner are not going to deal with the SBA yourself. The SBA does not act as a principle lender. Instead it backs loans made to small businesses that might otherwise not find a favorable market in traditional lending circles. This means that you will still seek financing from your regular source of lending: banks or other private financial institutions, and if they feel that you have merit but perhaps do not quite meet their more stringent requirements for a loan they put the loan forward to the SBA as a security backing.

The SBA (Small Business Association) provides security for part of the loans presented to them. That way the lending financer shares part of the burden of your risk and they assume the other share. Therefore, you will still need to present a good case to your lender to convince them of your worthiness for a loan.

When you are looking for small business loan consideration it is important to make sure the lender you use participates in the program. Not all lenders do and it is not required by law. Thankfully it is not hard to find lenders that work happily with the SBA.

Types of SBA Loans

The most common SBA loan is the Basic 7(a) Loan Guarantee. This loan covers many areas and can be used for a wide variety of business resources. As with most SBA loans to qualify for this loan you must be a for-profit business and present a solid performance record and/or business plan to prove your desire to make money from your company. While the Basic 7(a) Loan can be used for most business applications there are some very pointed things it may NOT be used for:

- Refinancing existing loans or debts. - Create a change of ownership of the existing business, partial or full, that will not enhance the current business. - Provide funds for the owner, or any partner in the business. - Pay back taxes, liens, or any other funds in escrow. - For any function considered unsound for the business.

The next common type of SBA loan is the Certified Development Company (CDC) 504 Loan. This is a long-term loan with a high maximum; however, the drawback to this loan is that it has very defined uses. This loan must be made for the acquisition of business equipment, real estate, equipment for expanding an existing business, or the expansion of an existing business. This loan may NOT be used for:

- Working capital - Inventory - Debt repayment - Consolidation, or refinancing

To be eligible for the 504 Loan a business must be for-profit, and not engage in any form of speculation or real estate for investment or rental.

Finally there is the Microloan, 7(m) Loan Program. This is a short-term loan with a maximum of $35,000 made to small businesses and even not-for-profit businesses for child-care. It is a loan designated for working capital, and many other operating expenses such as the purchase of initial or on-going inventory, supplies, and other operating needs. This loan may NOT be used for:

- Pay debts - Purchase property

Extra Considerations

Along with size there are some types of business that have other criteria that have extra criteria to meet to be eligible:

- Franchise businesses: Franchise businesses are eligible for SBA loans so long as the owner of the business is not in control of the main franchise, or has power to control the operation. They must also have a right to profit from the franchise as an owner should. - Recreational clubs and facilities: In order to be eligible the business must be open to the public, not biased against any one person or persons, and operate for a profit. - Farms and Agricultural types of business: Are eligible but should pursue more specialized loans from ag related sources. - Fishing vessels or businesses: Are eligible for loans not covered by the National Marine Fisheries Service. - Medical facilities: Are eligible so long as they have the appropriate licensing and are more than a boarding house type of facility.

There are also considerations for certain persons who are eligible so long as they have the lawful right to operate a business. Those persons on probation or parole are only eligible if they are not currently involved in a current parole or probation situation, currently a defendant in criminal court, used a SBA loan application to get their probation or parole lifted or suspended.

Who Can Not Apply for a SBA Loan

The SBA does not guarantee loans for real estate investment firms or business involved in rental properties. You cannot successfully apply for a small business loan if your business is speculative in nature, involved in lending, an MLM or pyramid sales program, operating for the purpose of gambling, or for any illegal activity.

The SBA does not approve loans for charitable, religious, or other non-profit organizations.

Final Thoughts

In some cases there are penalties involved in repaying a loan early. Be sure to talk to your lender about all of the possibilities before signing any loan. There is rarely a problem with business loans of any kind when you take the time to completely understand the requirements. Never be in too much of a rush. It is understandable that you are anxious to get going. You are excited about your prospects and that is good. Diving into any loan just because you can get it is never a good idea, however. The best circumstances is when you are calm, ready to do all your homework, and also ready to push away from the table if you do not feel the situation is desirable.

The SBA offers many classes for business owners to help them fully understand what is available to them as well as other vital aspects of operating a business. The SBA wants you to succeed, and they want to help you every step of the way.

SBA Loans Business Lending

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