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How to Get a Loan to Start a Business
Here's what you need to know about applying for a Small Business Administration-guaranteed loan through your local bank.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
October 15, 2009
I’m starting my own business. Can I get a loan from the Small Business Administration? How do I apply?
Interestingly, the Small Business Administration doesn’t actually offer small-business loans (other than for disaster assistance). Instead, the SBA guarantees a portion of commercial loans, which can make banks more comfortable lending to small businesses. The SBA guarantees more than $10 billion in business loans every year.
You apply for an SBA-guaranteed loan through your local bank, which must follow certain rules to be eligible for the SBA’s programs. The agency’s most popular financial-assistance program, the 7(a) loan program, is available to wholesale businesses with no more than 100 employees, and retail or service businesses with less than $21 million in annual revenues.
You negotiate the terms and interest rate with a lender, subject to the SBA’s rules. Loans that provide working capital can mature in as few as seven to ten years. Loans for machinery and equipment can be repaid over ten to 25 years, and loans for real property may last up to 25 years. The interest rate may not exceed 2.25 points over the prime rate for loans of less than seven years, or 2.75 points over prime for loans of seven years or longer. Loans of $50,000 or less may be subject to slightly higher rates.
The SBA generally guarantees 75% of the loan (85% for loans of less than $150,000), and the borrower usually pays the SBA lender fee; the standard fee is 2.0% for loans of $150,000 or less that last for more than a year. The SBA also offers special loan programs for veterans, active-duty members of the military and their spouses, and fast-turnaround micro-loan programs of up to $35,000 made through nonprofit lenders. See SBA.gov for links and more information about the loan programs.
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Reader Comments (6)
Posted by: vance brown at 10/16/2009 01:41:38 PM
THANK YOU very much for your good information! you have helped alot of people with your website & i will keep checking it often. GOD HIMSELF will bless you for sharing this with the world! apparently you have a heart of gold in trying to help other people.
Posted by: MR. JB at 10/18/2009 01:27:40 PM
And God bless you, Vance Brown, for taking the time to share such heartfelt words with this author. Not only am I sure she appreciates it, but as a fellow reader I do as well. Much success to you.
Posted by: Andy Keller at 12/01/2009 09:30:23 AM
Overall the information in the article is excellent but is misleading on a few of points. First one of the more popular loan programs in the SBA Express Program since it has minimal paperwork involved and can be approved by the lender under delegated authority. The trade off is that the maximum interest rate spread is 6.5% for loans of $50,000 or less and 4.5% for loans of over $50,000 up to the program limit of $350,000. Second the last paragraph implies that loans to veterans, active-duty members of the military and their spouses are limited to $35,000. Actually this is a supercharged program for these groups since the loans go to $500,000 and have the minimal paperwork requirements of the SBA Express Program. Finally, while your interest rate spreads are correct there are other base rates besides Prime which currently would result in a higher interest rate. Right now SBAs peg rate is 4.0% while Prime is only 3.25%.
Posted by: Jay at 12/10/2009 11:04:44 AM
This is a very flimsy article and either shows a lack of research on the part of the writer or a lack of depth by Kiplinger's. The article's title is deceptive - it is not about how to get a loan to start a business, the article is about how to get an SBA loan. And even that is deceptive because all it really talks about is the interest rate spreads between prime and SBA loans for apparently a small subset of possible loans. But what I find most annoying is that the article says clearly "You apply for an SBA-guaranteed loan through your local bank, which must follow certain rules to be eligible for the SBAs programs" but then completely fails to mention WHAT THOSE CERTAIN RULES ARE. Do they vary by region/state/city or are they nationwide? Are there income and liquidity guidelines/rules? Is there a form? Just posting a link to SBA.gov is a weak attempt to put the onus of research on the reader. Very disappointing.
Posted by: Sam Clymer at 12/11/2009 05:15:07 PM
Explaining how to get an SBA loan is very nice if you can find a single bank in this country that is even willing to do one for you! Most of them have a rule that if you don't qualify for a direct loan from them they don't want to fool with the SBA loan. They can make more money taking the TARP funds and loaning them back to the government at twice the rate they are borrowing them for, so why take any chances with small businesses. Good luck to anyone trying to get an SBA loan today. I qualified and met every requirement that the SBA has and I was turned down flat by three banks and two online funding groups. No start up's is the first thing you hear, then they follow that up by if you have more collateral then the amount of money you are seeking there may be a chance. The big sign over every banks door says if you really need it you have come to the wrong place!
Posted by: Matt at 01/04/2010 07:56:01 PM
As a Commercial Loan Officer I can point out one very important missing point, Cash Flow. Regardless of the SBA fee structure, interest rates, willingness to lend, etc. business owners must demonstrate the ability to repay the loan. I have yet to see a loan request that mitigates the recent downturn in sales, profitability and higher expenses.