During the pandemic, the Small Business Administration (SBA) received widespread media attention for its COVID-19 relief programs, such as the Paycheck Protection Program (PPP), which provided much-needed loans to more than 5.2 million American businesses in 2020.
In Middle Tennessee, First Horizon processed more than $405 million in PPP loans, saving many small business owners from closing because of the pandemic’s negative effects on the U.S. economy.
Many Middle Tennesseans are not aware of the on-going programs and services the SBA provides to support small businesses in our community. An SBA expert at a local bank can work with business owners to understand what’s available and how to best navigate the often-complex SBA qualification process.
One of the more important ways the SBA can help small business owners is through SBA 7(a) loans, whose terms are attractive to growing businesses intent on preserving operating capital. These loans typically require less of an equity injection or down-payment than normal and are amortized over longer periods than conventional loans, which may result in a lower payment.
The following list provides an example of the many ways SBA 7(a) loans can be used to assist small business owners:
• Construction, renovations or leasehold improvements
• Purchasing land, building and/or equipment
• Working capital and/or inventory
• Financing start-ups, business acquisitions or partnership buyouts
• Refinancing business debt
The maximum SBA 7(a) loan amount available to borrow is $5 million. If the borrower is well-prepared, it usually does not take long to find out if an SBA loan is approved. Once the loan is approved, a commitment letter is sent to the applicant with the terms and conditions of the loan.
The closing process can differ based on the project type and collateral securing the loan. Typically, straight purchases and business acquisitions can close quickly, while renovations and construction projects take a little longer.
The SBA can be discerning in determining which businesses are eligible for SBA 7(a) loans, but the majority of small American businesses qualify if they meet the following criteria:
• The business must be defined as a small business by the SBA and be operating for profit within the U.S. or its territories
• The loan must be used for a sound business purpose
• Most types of businesses are eligible. Exceptions include but are not limited to: Real estate investments, Lending companies, Pyramid sales companies
In addition, businesses that are speculative in nature, or that have wild fluctuations in value for price or trade, are not eligible for SBA 7(a) loans. These would include coin or stamp collecting and businesses that operate in the gambling industry, among others.
The bank lends the business the money and the SBA provides a guaranty, which is usually 75% of the loan amount. The bank is responsible for meeting all of the SBA’s requirements before closing the loan, as well as during the life of the loan. If those requirements are not met, the bank can lose all or part of its guaranty.
The bank relies on the SBA guaranty in order to offer terms that it may not otherwise be able to approve, such as the loan not being fully secured or having a lower down payment. Therefore, it is very important to follow SBA’s rules and documentation requirements to ensure the bank has a valid guaranty.
When seeking loans with the SBA, it is critical to use a preferred lender. These are typically subject matter experts in the area of SBA lending that guide the process of obtaining an SBA loan. Understanding the expertise of the team before beginning the application helps ensure a smoother process and proper guidance. It is also recommended that you work with a bank that takes a team approach, considering all of your banking needs.
The state of Tennessee is home to more than 600,000 small businesses, with many of them located in Middle Tennessee. These important businesses are the lifeblood of our communities, adding greatly to local economies and creating hundreds of thousands of jobs.
An SBA banker can help with a 7(a) loan or find other programs through the SBA to help grow your small business.
Shea Wood Turner is VP, SBA Banker and Team Lead at First Horizon Bank.