Is an SBA or USDA business loan a good fit for your business?
Written by Ryan Collins
If you’re looking to access capital to start or expand your business, you may be researching the various loan options available to you and wondering - which loan option is a good fit for my business?
The United States Small Business Administration (SBA) and United States Department of Agriculture Rural Development (USDA) have programs that provide access to capital for businesses to assist them wherever that business may be in its life cycle. This can be to help a business start-up, restructure or expand. Each of these programs provides a federal guarantee to a lender and various benefits to the borrower.
In this article, we’ll walk you through the purpose and benefits of each loan program to help you understand which loan program is best suited for your business’ needs.
SBA Loan Program Overview & Benefits
The SBA 7(a) loan is the SBA’s most common program which provides flexible, longer terms and lines of credit for a variety of purposes. Most common uses of the 7(a) programs are: business acquisitions (stock or asset purchase), funding of working capital, debt refinance, business start-up, etc.
- Location - SBA 7(a) loans can help US based businesses anywhere in the United States.
- Available Loan Maturity – SBA 7(a) allows for up to a 25-year term given that the loan proceeds are utilized for 51% or greater on real estate. If real estate is part of the loan, but accounts for less than 51% of loan proceeds, a blended term is available. All other non-real estate SBA 7(a) loan are given a 10-year maturity.
- Prepayment - SBA 7(a) loans do not have a prepayment penalty, so long as the maturity is less than 15 years. If 15 years or greater, it will hold a 5/3/1 descending prepayment penalty.
- Borrower type – SBA 7(a) can help for-profit (US Based) entities within SBA size limitations.
- Loan Amount - SBA 7(a) maximum loan amount is $5 million.
- Guarantor Net Worth Requirements - SBA 7 (a) does not have a minimum net worth requirement of guarantor’s (owners 20% or greater) at closing.
- Collateral - SBA 7(a) program can allow funding to businesses even if there is an absence of collateral.
- Funding available to cover start-up costs
- Existing businesses can finance the purchase of land or buildings, equipment, machinery, and inventory
- Loans available for new construction, expansion projects or conversion of existing facilities
- Working capital loans to continue business’ growth.
USDA Loan Program Overview & Benefits
The USDA Business and Industry (B&I) program offers loan guarantees to lenders for their loans to rural businesses which allows lenders to provide more affordable financing. By increasing access to business capital, this program improves the economic health of rural communities and residents.
- Location - USDA B&I loans are limited to businesses located in rural communities with less than 50,000 population.
- Available Loan Maturity - USDA B&I loans repayment term allows for the lesser of the useful life of the assets being financed, or 7, 15 and 40-years for working capital, equipment and real estate, respectively.
- Prepayment - USDA B&I loans typically have a declining prepayment penalty over 5-years.
- Borrower type –USDA B&I loans can help for-profit (US Based) entities investors, not-for-profit entities and public bodies. Unlike SBA, USDA has no size limitations.
- Loan Amount - USDA B&I maximum loan amount is $25 million.
- Guarantor Net Worth Requirements - Under USDA B&I, existing businesses must meet either a minimum 10% balance sheet equity at loan closing or borrower investment of equity or other funds into the project in an amount of 10% of more of total project cost. New businesses must meet either a minimum 20% balance sheet equity at loan closing or borrower investment of equity or other funds into the project in an amount of 25% of more of total project cost.
- Collateral – USDA B&I loans must be fully secured by assets held by the business
- Makes it easier for businesses in rural communities to access more affordable fixed or variable rate financing
- Greater type of borrowers eligible
- Larger average loan amounts
- Competitive interest rates and terms
Which loan program is right for your business?
Both SBA 7(a) and USDA B&I loan guarantee programs offer a variety of benefits depending on your business needs. As the #1 bank in Iowa in both SBA 7(a) lending and USDA loan guarantees, Lincoln Savings Bank’s is well positioned to help you get the financing your business needs.