Small businesses start with passion and ideas. But they need funding to get off the ground. The Small Business Administration (SBA) has been a primary resource used by Veterans and civilians for obtaining loans to fund their startups and existing businesses. While the SBA doesn’t directly loan money to business owners, the SBA does guarantee loans made by participating lending institutions.
The basic program utilized by the SBA for small businesses is the 7(a) loan. The 7(a) loan is the most utilized loan by the SBA because it can be used for a multitude of business purposes. Additionally, it is more easily approved, a plus for business owners who may otherwise have difficulties procuring loans directly from lenders. Small business owners, especially those who are just starting their companies, may not have the cash flow that independent lenders require. The SBA serves to provide lenders with an increased guarantee against a defaulted loan. The 7(a) loans are capped at a maximum of $2 million.
In an effort to promote entrepreneurship, the SBA has also taken the initiative to waive fees on smaller loans. On loans under $150,000 guaranteed through the SBA after October 1, 2013, the fees have been set at 0%.
The SBA recently announced that small business borrowers who have or will receive SBA 7(a) guaranteed loans of $150,000 or less during Fiscal Year 2014 (October 1, 2013 – September 30, 2014) will have saved more than $6.3 million. The SBA contends that this number includes fees that were eliminated on the agency’s smallest loans, including approximately $142,000 in savings to 179 borrowers in the Santa Ana, CA District.
The waived fees are part of the SBA’s initiative to make it more cost effective to originate smaller loans. In addition to the fees that borrowers typically pay based on the amount guaranteed by the government, the ongoing monthly fee paid by SBA lenders will be eliminated for the entire life of 7(a) loans of $150,000 or less made while the initiative is in effect.
The SBA still includes fees on loans greater than $150, 000. On any loan greater than $150,000 with a maturity of one year or shorter, the fee is 0.25 % of the guaranteed portion of the loan. On loans with maturities of more than one year, the fee is 3% of the SBA-guaranteed portion on loans of $150,000 to $700,000, and 3.5 % on loans of more than $700,000. There is also an additional fee of 0.25 % on any guaranteed portion of more than $1 million.
The SBA believes that fees collected from larger loans are expected to offset any losses sustained from the smaller loans.
To participate in the 7(a) Loan Program, a lender must meet requirements that are indicated in the Code of Federal Regulations.
Active duty military, Veterans and any civilian interested in starting a small business should utilize the SBA’s website, www.sba.gov as a valuable resource.
