SBA 7(a) and 504 loans in plain English

For its main business programs, the Small Business Administration does not hand out the money. It guarantees part of a loan made by an approved lender, which makes that lender willing to lend longer and to borrowers it might otherwise turn down. The borrower still applies to, and is underwritten by, a bank or other SBA lender, under SBA's rules (its standard operating procedure, SOP 50 10).

A 7(a) loan is a loan from an SBA lender with a partial SBA guarantee. Uses listed on sba.gov include working capital, refinancing business debt, equipment, furniture and fixtures, acquiring or improving real estate, and changes of ownership (buying a business or a partner's share).

The maximum 7(a) loan amount is $5 million. Maturities are generally 10 years or less, unless the loan finances or refinances real estate or equipment with a useful life over 10 years; real estate loans can run up to 25 years. Other variants exist for exporters and contractors, and SBA sets maximum interest rates lenders may charge (see sba.gov).

A 504 loan finances major fixed assets: buying, building or renovating real estate, and long-life machinery and equipment. It cannot be used for working capital or inventory, or for speculation or rental real estate investment. It always involves three parties:

Example with made-up numbers: a manufacturer buys a $2,000,000 building. The bank lends $1,000,000 (50%), the CDC lends $800,000 (40%) and the owner puts in $200,000 (10%). The CDC portion comes with 10, 20 or 25-year terms and a rate tied to a margin over the 10-year Treasury. Debenture limits depend on the project type and sba.gov pages currently state them inconsistently, so confirm the limit for a specific project with the CDC.

SBA lists its own processing time for a standard 7(a) as 5 to 10 business days, but that is only SBA's step. Before it, the lender has to collect the package, underwrite, order appraisals or valuations and get credit approval; after it come closing conditions. Expect weeks for a straightforward file and months for real estate or acquisitions. A merchant who needs money in ten days is not an SBA candidate, however good the file.

SBA calls brokers, packagers and consultants "agents". When an agent is paid in connection with an SBA loan, by the applicant or by the lender, SBA requires the arrangement to be disclosed on SBA Form 159, the Fee Disclosure and Compensation Agreement, which SBA lists for the 7(a) and 504 programs. SBA limits what agents may charge and how; the rules are in the form's instructions and SOP 50 10. Read the current version before you agree a fee, and never charge a merchant in a way the form does not allow.

In Ferrylend, set the deal's Product to SBA 7(a), SBA Express or SBA 504. The Application tab then asks for what SBA lenders need: itemized use of proceeds, the debt schedule, affiliates, collateral, Form 413 personal financial lines for every 20%+ owner, the Form 1919 questions and, for a 504, the property. Use the SBA 7(a) checklist on Documents & stips adds the SBA package, including Form 159 when you answer that an agent is paid. On SBA offers the calculator estimates the upfront guaranty fee from SBA's current 7(a) fee notice, labelled as an estimate with its effective dates; for a 504, or outside those dates, enter the fee the lender states. SBA E-Tran integration and SBA form generation are not built. See CRM for SBA loan brokers.