Types of SBA Loans

 
While big businesses can turn to a variety of sources to fund their start up or growth and expansion plans, small businesses are much more limited in their options. The SBA is the number one provider of funds and resources in this niche market. The types of loans that the SBA programs support are almost as varied as the clients who use them to borrow money for their businesses.
 

7(a) Loans

The 7(a) Loan Program is the primary loan guarantee program offered by the SBA. It is also the most popular and basic program offered. Lending Institutions that offer 7(a) loans agree to structure their loans according to the SBA guidelines. In return, the lender receives a guaranty on a portion of the funds loaned. In the event that the borrower defaults, the SBA and the lender share the risk.

 
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Under this program, the SBA guarantees up to 85% of the loan for loans up to $150,000 and 75% for loans up to $2 million, i.e. a maximum guarantee of $1.5 million of the loan. For example, if a borrower takes a loan for $100,000, then the SBA guarantees $85,000 (85% of the loan) and if the borrower takes a loan for $2 million, then the SBA guarantees $1.5 million of the loan


504 Loans

The 504 Loan Program offered by the SBA is also referred to as the Certified Development Company Program (CDC). This program provides long-term financing which small businesses can afford to repay. It also offers the stability of a fixed interest rate, so that small businesses can expand and grow without the worry of their monthly payment changing. Under the 504 loan program, the lender provides 50 percent of the project finance and receives a first mortgage on all the available assets. A loan is then advanced, which is secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture), covering up to 40 percent of the cost with the borrower providing as little as 10 percent. This type of loan works quite well as the position of the financial institution is secure because it is only financing 50% of the loan with a first mortgage and the balance is financed through the SBA. The assets being financed are typically used as collateral.