Business financing and the Small Business Administration

  • Colleen Ryan

    Colleen Ryan

Posted5/10/2016 1:00 AM

Since 1953, the federal government has administered several programs to encourage lenders to provide more loans to businesses that might not otherwise be able to obtain financing with reasonable terms and conditions. This assistance, usually in the form of a loan guarantee, helps reduce some of the risk to banks, encouraging them to make loans and increase the flow of capital to business. The SBA loan guarantee is similar to a student loan guarantee. It assures the lender that if the borrower defaults, the SBA will reimburse the lender for its loss, up to the percentage of the SBA's guarantee.

The SBA's 7(a) program is the agency's most popular loan program due to its flexible terms and the wide array of purposes for which the funds can be used. These purposes include the purchase of an existing business; acquisition, renovation and expansion of owner occupied real estate; equipment, leasehold improvements, inventory, working capital, refinancing existing debt and startups. Ineligible purposes include speculative, rental or investment real estate; partial business acquisitions, and financing for nonprofits and religious organizations.


One of the program's greatest benefits is to the ability to provide longer term financing for businesses than banks typically offer, resulting in improved cash flow for the business. The loan term depends on what the funds will be used for -- up to 10 years is available for working capital, inventory and equipment. Up to 25 years is offered for real estate projects.

Many borrowers are surprised to learn that SBA 7(a) interest rates are not dictated by the SBA but are competitive market rates that are negotiated between the applicant and the bank.

The rate is composed of two parts, a base rate and an allowable spread. The base rate is the published Prime rate and the spread depends on the term of the loan. Rates for a loan with maturity of less than seven years can be up to a maximum of the Prime rate +2.25 percent. For loans that mature in seven years or more, the rate can be up to a maximum of prime +2.75 percent. Rates may be fixed or floating and are negotiated with the bank.

A misconception is that only very small businesses can qualify for SBA loans and that only small dollar loans are available. This is not true.

The federal government has various size standards for different types of businesses, depending on whether they are retailers, manufacturers, wholesalers or service providers. The size standards can be found on the SBA website ( and are based on the business classification system known as NAICS -- North American Industry Classification System. Businesses with 500 employees and more have obtained SBA backed loans. Loans up to $5 million are available with an average SBA loan in Illinois of about $360,000.

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The SBA's 504 Loan Program provides long term, fixed rate financing for the acquisition and renovation or construction of owner occupied real estate and equipment. Owner occupied is defined as a property that houses 51 percent or more of the business operations.

The occupancy requirement increases to 60 percent for new construction projects. Recently the SBA announced that it will once again permit refinancing of real estate debt under the 504 program. With lower equity requirements than banks want, the 504 program is a good way for a business to retain cash for future growth.

Like the 7(a) program, 504 applicants must meet SBA size guidelines and other eligibility considerations. A key difference is that under the 504 program, the maximum term for a real estate loan is twenty years compared to the 7a) term of 25 years.

An experienced SBA lender who understands the program requirements and manages the application process on behalf of the borrower can submit applications to the SBA electronically and usually be assured of a reasonable approval timetable, often within 36 hours.

SBA loan programs play an important part in increasing businesses' access to capital, helping them expand and increase profitability, often with the result of new job creation. These vital benefits to the business and the economy in general, should encourage all businesses to consider SBA loans as part of their path to success.

• Colleen Ryan is senior vice president, business banking and SBA, and Inland Bank and Trust in Oak Brook. Contact her at

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