Understanding the types of SBA loans
Positive economic signs are fueling brisk business lending in Madison and Central Wisconsin. The U.S. economy added 280,000 jobs in May, exceeding expectations, and more people are entering the workforce as wages increase, according to the U.S. Department of Labor.
In the first quarter, farm loans increased by 10.2% over the same period in 2014, and commercial and industrial loans increased 8.5%, according to the Federal Deposit Insurance Corp. Loans through the U.S. Small Business Administration set a record for the 2014 fiscal year with a 12% increase in approvals and a 7.4% increase in dollar amount compared to 2013 for 7(a) loans, its most popular program. Year-to-date, SBA loans are up 21% through May, compared to the same point in 2014.
Overall, many economists say consumer spending remains healthy, a great backdrop for small business growth. And although there are many private sector lending options, SBA loans are especially good for the types of businesses in our region. However, many business owners don’t realize there are SBA options beyond the 7(a) program.
In general, SBA loans, capped at $5 million, can be used for working capital, purchase of equipment or property, building new construction, or starting a business. Other government-backed loans include U.S. Department of Agriculture (USDA) and Farm Service Agency (FSA). All are administered through banks and other lending institutions and require personal guarantees.
Below is information on the types of SBA and other government-backed loans:
General small business loans 7(a) — Used to start a business or assist in the acquisition, operation, or expansion of an existing business, including farms. Eligible farm expenditures include fencing, irrigation systems, and construction of silos, barns, dikes, and dairy and hog buildings, and buying seed or animals. Terms are for up to 25 years for real estate and up to 10 years for equipment and working capital. Fees range from 0%–3.75%. Interest rates may be fixed or variable and are negotiated between the business owner and lender, subject to SBA rules.
CDC/504 loans — Certified Development Company (CDC/504) loans are intended for for-profit companies that have a net worth of less than $15 million and average net income less than $5 million after taxes for the preceding two years. They can be used to purchase equipment, machinery, or property, including buildings, for improvements such as grading, street improvements, and utilities, or for new construction or renovation. Fees are about 3%, while interest rates are pegged to 5- and 10-year U.S. Treasury issues. The project’s assets are used as collateral. Loan terms are up to 20 years and some loans can be linked to job creation.
Microloan program — Provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers. Microloans average about $13,000 and are administered through designated nonprofit community-based organizations with lending experience. The loans can be used for working capital, equipment or supplies, furniture, fixtures, machinery, or equipment. Interest rates vary but generally are 8%–13% for the loans, which require collateral.
Disaster loans — Low-interest, long-term loans for physical and economic damage caused by a declared disaster to businesses located within the disaster area. Loan terms are up to 30 years, with interest rates up to 4% if you have no other source of credit; up to 8% otherwise.
USDA loans — Can be granted for some agricultural uses (excluding production), but often are made in other types of businesses because of demographic requirements. To be eligible, the business must be located within a rural area with a population less than 50,000. With a limit of up to $25 million and terms of up to 30 years, these loans are advantageous for manufacturers and other large businesses for working capital, machinery and equipment, or buildings and real estate. Fees are 3% of the guaranteed amount, which ranges from 60%–80%, depending on the amount borrowed. Interest rates are negotiated with the lender, and may be fixed or variable.
FSA loans — Available to farmers or ranchers for operating costs, cattle, equipment, and real estate. The loans, which range up to $1,392,000, also can be granted if a natural disaster, such as drought, flooding, or a bad storm, ruined crops or damaged farm buildings or equipment. There also is a direct lending program, capped at $300,000. Interest rates, fees, and terms for farm loans vary depending on the business and the type of the loan.
Depending on the circumstances, a business owner can combine government-backed loans with conventional loans to match the company’s needs for expansion and growth.
Stephen Machotka is market president for Wisconsin Bank & Trust.
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