SBA 7(a) FAQ

SBA 7a FAQQ: What are the advantages of SBA financing for a small business?

A: Simply put, a longer term means lower payments. Lower payments allow the business to retain and utilize more working capital, which is essential for a growing business. Additionally, all SBA loans are fully amortized. Therefore, the business will not be impacted with renewal fees, interim appraisal costs or untimely balloon payments.

Q: Is my business eligible for SBA financing?

A: Over 95% of the nation’s companies are classified as “small businesses” by SBA standards. Limitations are set by total revenues and number of employees according to industry. Almost every type of business qualifies for SBA financing: manufacturing, wholesale, service, retail. Loans cannot be made to speculative businesses, media businesses or businesses engaged in gambling activities.

Q: How much can I borrow?

A: Arkansas Capital Corporation offers SBA 7(a) financing up to $5 million.

Q: What can the funds be used for?

A: SBA Guaranteed Loans can be used for virtually any legitimate business purpose. Examples include: Purchase real estate, make improvements to business property, purchase equipment, expand a business, consolidate debts, purchase another business, construct a new facility and finance a franchise.

Q: Aren’t SBA guaranteed small business loans only for businesses that are not creditworthy by traditional banking standards?

A: On the contrary, SBA financing will not be extended to any business that does not demonstrate the ability to repay debts. The longer terms allowed with SBA guaranteed financing can enable a small business easier debt qualification based on lower payments.

Q: What amount of equity will be expected in any financing request?

A: For an existing business, borrower equity can be as little as 10%, depending on creditworthiness. Start-up businesses are required to contribute between 20% and 30% of the total project costs. Equity injection is typically cash.

Q: What else do I need to know?

  • Sufficient cash flow to meet proposed debt service
  • Personal guarantees are required
  • Hazard insurance is required
  • Current appraisals are required on real estate collateral
  • Assignment of life insurance is required on key individuals

Q: Will the government be looking over my shoulder for the duration of my loan?

A: As with any commercial loan, the lender, rather than the government, monitors and services the loan. The government’s involvement relates to the guarantee only in the event of default.

Q: What are some common myths about SBA financing?

  • It does not take 6 to 9 months to get funded. On average, it takes 60 days to process an SBA loan from submission to final funding.
  • You do not have to be “turned down” by a bank prior to applying for an SBA loan.

Q: Can SBA loans be used to refinance existing business debt?

A: Yes, but certain criterion applies.

Q: Can SBA financing be used for construction?

A: Yes, as long as the business will occupy at least 60% of the new building. The construction loan will convert to a fully amortized loan at the end of the construction. If an existing building is financed or refinanced, your business must occupy at least 51% of the facility.

Q: What costs are associated with an SBA loan?

A: By statute, the maximum interest rate that can be charged is 2.75% over the National Prime Rate for loans with maturities of seven years or more, and 2.25% over the National Prime Rate for loans with maturities of less than seven years. The SBA itself charges a guarantee fee based on the loan amount, which is the only cost associated with the benefits of long term SBA borrowing. This fee can be financed as part of the loan proceeds.

Q: How long will I have to wait for a decision on my application?

A: Qualified applicants are given a Proposal Letter outlining major points of the loan. Upon receipt of all required information and the executed Proposal Letter from the applicant, the formal underwriting will begin with presentation at the next loan committee. Arkansas Capital Corporation’s loan committee regularly meets twice each month.

Q: What are the general collateral requirements?

A: SBA does not permit its guaranty to be used as a substitute for available collateral. SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.

Q: What does Arkansas Capital Corporation look for in a successful borrower?

A: After determining which loan product best fits the applicant’s needs, Arkansas Capital Corporation will analyze the loan application information based upon a combination of several factors, which include:

Cash Flow Coverage
Cash flow sufficient to cover business debt service is required. Cash flow coverage is determined after owner’s withdrawals or officers’ salaries, existing debt service and proposed debt service have been deducted. A sufficient amount of living expenses will be considered for sole proprietorships. Fluctuations in cash flow coverage must be explained.

Debt To Worth Ratio/Capital
Generally, a debt to worth ratio of 4:1 or better is expected, and required for start-up businesses. This ratio indicates the equity within the business, or what the owners have at risk. In cases where the debt to worth ratio is manipulated through forgiveness of debt, standby debt and market value balance sheet adjustments, explanations are required.

Collateral
SBA does not permit its guaranty to be used as a substitute for available collateral.SBA requires that the lender collateralize the loan to the maximum extent possible (on a discounted basis) up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the principals as collateral.

Management
The amount of management’s direct experience in the business can determine the overall viability of the loan request. Financial statements of existing businesses help indicate management’s abilities. Information should also be submitted on key management and guarantors, duties and responsibilities. For start-up businesses, resumes should be detailed enough to explain past history and how it relates to the start-up business.

Credit History
The borrower’s personal and business credit history are considered. Credit blemishes must be explained in order to justify continued credit consideration.

Conditions
The business owner should also be prepared to address other conditions of their loan request that may affect the success of the business, such as industry trends, seasonality, location and competition.