When it comes to financing, many small business owners think of the Small Business Administration as a lender of last resort.
While their Office of Disaster Assistance speeds funds to borrowers affected by natural disasters, its main function is facilitating loans to viable businesses. In the 2008 financial crisis, the SBA facilitated 70,000 loans to businesses, most of which would normally have been eligible for conventional bank loans.
Banks participating in the SBA loans say business owners often believe funding is from the government, but it isn’t, which is why some lenders don’t participate.
Loans issued through the SBA’s popular 7a program carry a government guarantee of 75 percent to 85 percent. That means the banks have to cover a loss of up to 25 percent if the loan goes bad.
As with any loan, a borrower has to have property or assets to secure a certain percentage of the loan amount. The interest rate on 7a program loans is the prime rate plus 2.25 percent for less than seven years. It’s prime plus 2.75 percent for a loan term greater than or equal to seven years, according to Wells Fargo Bank.
Borrowers often assume it will take months to close an SBA loan. That isn’t so. The process typically involves a six-week processing period, assuming the borrower is prepared up front. Normal processing time is about six weeks. The paperwork involved is pretty much consistent with a conventional loan, such as financial statements and tax returns.
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