An update on SBA loans
The Small Business Administration (SBA) is an agency in the US Government that provides loan guaranties to banks that allows them to provide financial help to small businesses. This lets lenders give loans to small businesses that might otherwise be too risky without this additional level of insurance. The most common SBA loan is called a 7(a) loan.
SBA loans can be used to acquire or improve real estate, refinance other loans, purchase machinery and supplies, or some combination of these. Loans typically range from “microloans” around $50,000 to a maximum of $5,000,000 for a 7(a) loan. SBA loans have the benefit of having rates and fees that are very competitive with the general market, and also can have lower down payments and flexible overhead requirements.
SBA loans can be used to buy out whole or partial business owners. This is especially useful if a younger family member or long-time employee is looking to “buy out” an owner who wants to make sure that their small business is in good hands but who also wants money to retire. When this happens, the buyer will need funds to purchase not only any assets like real estate or equipment, but also the stock or ownership interest of the retiree. An SBA loan can help bridge this gap, but loan approval can be impacted by the terms of the sale, including the business purchase contract and non-compete agreements.
SBA loans typically also require personal guarantees. This means that the owner will need to personally back up the loan as an individual, and not just as a business. In Indiana and Michigan, this can impact the borrower’s spouse. SBA loans may also require the borrower to allow the lender to put a lien on their property, like their home. If the loan defaults, then the lender can foreclose. This puts pressure on the borrower to ensure that they are putting time and effort into ensuring that the business succeeds.
In 2024, the SBA released new guidelines that will make its loans available to more borrowers and that are intended to benefit a broader pool of businesses with the Community Advantage program. There are more financing options available for acquisitions and start-ups, with an emphasis on supporting loans in underserved markets like veteran-owned businesses and low-income communities. Small businesses that may have been unable to secure a loan in the past may now be eligible.
When considering if an SBA loan is right for your business, it is easy to imagine all the good that the money will do. It is also important to consider all of the downstream implications that the loan may have, including its impact on the business’s structure, the owner’s property, and restrictions on future sales of business or personal assets. Consulting an experienced business attorney before the loan is funded can help a potential borrower build a stable legal structure and can make the transaction go more smoothly.
This article is for information purposes only and is not intended to constitute legal advice.