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Think of the SBA as a broker or clearing house for lenders that are willing to provide loans as long as the loans are 100% secured. The SBA working under laws created by congress created a federally secured loan for private lenders and these loans are secured by American taxpayer dollars.
The lenders have basic rules under the 7(a) loan program.
- Loans can be from $5,000 to $2,000,000 for most small businesses but the SBA lists opportunities for lending between $50,000 and $5 million.
- Interest Rates can be negotiated between borrower and lender. This is very true, during disaster recovery lending most homeowners were not aware they could ask for 1.56% to 2.5% and often accepted what current market rates were. With COVID-19 the federal government via news media stated Zero percent but the SBA is not showing that percentage. They are listing 3.75% interest rates as of today.
- SBA will extend loans if you place collateral on the line. This can be adjusted and it's best not to place your home up for collateral for a loan that you have no clear plan on how you are going to repay.
- SBA typically gives up to 10 year repayment plans for equipment.
- SBA offers loans for Working Capital which is what you will most likely be needing because of a business loss directly related to the COVID-19 issue. Working capital loans typically are from 5 to 7.5 years.
- Forgive loans, some business owners may qualify for a forgive loan. These loans require at least 60% repayment in under 5 years. You will have to ask about them when you apply.
- Apply, Accept the loan but DO NOT DRAW FUNDS until they are needed and only draw funds enough to pay month to month your business needs. This was a major mistake most business owners and homeowners make. By taking partial draws you do not penalize yourself if grants become available and if a grant is created to repay your loan. If you draw a full loan that is not needed and your city Mayor or Governor opens up grants for businesses you will not qualify for the money because you have collected federal assistance via your SBA loan. You have to wait and communicate with local leaders to suggest plans that would make the debt burden to small business less of a problem. Your state and city does not profit from SBA loans, but, your state and your city do profit by processing FEMA grants and HUD grants. Remind them of that fact.
Do not take the first offer when presented with your closing documents. Ask for more and offer to pay less per month. You are dealing with a sales person that is trained to sell loans at the best market rate. This is a bankers loan in all respect except that it is managed by Congress and the Office of Budget and Management.
The SBA will make the claim they can get you money faster than private lenders and they will claim to be the lowest rates. This was proven not true in Florida 2017 when a local bank undercut for disaster recovery. As always, look to private lenders before the SBA and look for grants from community centers before loans.
The SBA may tell you that you only have 90 days to accept the loan. That's actually not true since congress allows you to apply for and accept a loan from the SBA after a declared disaster years ago. The SBA only needs to review your tax returns again. The SBA will send you a letter cancelling your loan at the 90 day mark. They will also include instructions on how to reinstate the loan. You can repeat this process for as long as you need the loan available to you.
Most business owners need to show profit and loss statements. The SBA is required to review profit and loss presented by the businesses. The SBA does not always follow this rule. In fact, the Office of Inspector General found that the SBA cuts corners to process loans quickly.