"EVERYTHING YOU NEED TO KNOW ABOUT SBA LOANS" : A PRIMER

You are the owner of a small business that needs to expand. Or the would-be owner of a franchise that you've been thinking about buying for several years. But, you are not quite sure of the best way to go about getting the financing you need.

For many entrepreneurs, one of the best options is a loan guaranteed by the Small Business Administration. If you are not familiar with the process, the following "primer" should provide the information you need to get started . . .

What is an SBA loan?

The Small Business Administration (SBA) makes loans available by providing a partial guarantee on loans made by participating lenders to eligible small businesses. It offers these loans because the federal government recognizes the critical role emerging businesses play in creating jobs and growing our nation's economy. In fact, small businesses were responsible for 75% of the net new jobs created in 1998 – the last year for which data is available. ¹

How is an SBA loan different from conventional loans?

SBA loans provide longer repayment terms and higher loan-to-value ratios than conventional loans, making it easier for you to keep your business on track. The longer term/ lower payment solution can be crucial when you reach an expansion phase in business growth, or the transition phase in purchasing an existing business or franchise, because you won't be burdened with a payment schedule that puts unreasonable pressure on your cash flow.

Who is eligible?

Most for-profit small businesses are eligible for SBA-guaranteed loans. These include manufacturing, wholesale, retail and service businesses . . . including independent or franchised businesses. In general, you must meet the following guidelines:

- Retail and service businesses with three-year average receipts not exceeding $5-20 million, depending on the industry

• Wholesale businesses with an annual average of 100 employees or less
• Manufacturers with an annual average of 500-1,500 employees, again depending on the specific industry

How much can be borrowed?

Under most circumstances, you may borrow as little as $50,000 and as much as $3 million. Some lenders can finance even larger projects through the SBA's 504 loan program, where they partner with a local Certified Development Company (CDC) to finance projects as large as $6MM.

What can you use an SBA loan for?

The most typical uses include:

• Purchase, construction or renovation of owner-occupied business real estate
• Acquisition of an existing business or franchise
• Purchase of machinery and equipment
• Refinancing of certain types of existing business debt
• Leasehold improvements and working capital in conjunction with the uses described above

What are the interest rates and fees?

The interest rate is variable, adjusted quarterly, and never exceeds the prime rate (as reported in the Wall Street Journal) plus 2.75%. Your actual rate will be determined by the term of the loan, the purpose for the funds and the strengths of both the business being financed and the borrower.

There are no points. There is a modest packaging fee and an SBA guarantee fee, which ranges from 1.7% to 2.6% of the loan amount and can be financed as part of the loan.

What are the repayment terms?

• Up to 25 years for a construction loan, real estate purchase or refinancing
• Up to 10 years for machinery and equipment
• Up to 7 years for working capital.

There are no balloon payments to surprise you, and no prepayment penalties on loans with terms less than 15 years – giving you maximum flexibility in deciding how to repay the loan.

What do I need to qualify?

The SBA requires proof that the owner is active in the business and willing to make a reasonable commitment to it. Other criteria:

• An adequate down payment from the owner (typically 30% for a start-up, 10% for the purchase or construction of real estate and 15% for the purchase of an existing business or strong franchise)
• All principals must show a satisfactory credit history
• The business must demonstrate an appropriate debt-to-net-worth ratio and adequate cash flow

You will also need at least three years of financial statements and/ or tax returns.

If you decide to seek SBA-guaranteed financing, be sure to look for a lender with extensive experience in your business or industry. And ask if they have earned Preferred Lender Program (PLP) status from the SBA, an indication that the two organizations have a close and efficient working relationship.

CIT Small Business Lending Corporation, whose parent company has more than $50 billion in assets, is America's largest SBA lender, providing thousands of companies with billions of dollars to finance business needs ranging from modest equipment purchases to construction of new buildings, since its inception in 1993. We have earned a reputation for efficiency and professionalism. CIT Small Business Lending Corporation has Preferred Lender Program Status in most SBA districts, which simplifies and speeds the application process. For further information, call 800.713.4984 or contact us on the web at http://www.smallbizlending.com/

1. Source: Small Business Administration

*Information courtesy of CIT Small Business Lending (www.smallbizlending.com)

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