As most small-business owners will tell you, the
last few years have been tough ones. The tightening
of the U.S. credit markets has been a big part of
our economic slowdown especially for closely held
businesses and anyone investing in real estate.
To combat the problem, the U.S. Small Business
Administration (SBA), started several new loan programs
in 2011. One of them is geared towards helping
small businesses that need smaller loans. In the past,
banks shied away from lending smaller amounts
because of the high costs of administering the loans
relative to the lower fees they were able to charge.
The introduction of the SBA Small Loan Advantage
Program, or SLA as it is commonly known, allowed
approved banks to lend up to $350,000 to small
businesses with an SBA guaranty. The SBA guaranty
insures the bank against losses, allowing banks to
lend more freely.
The SLA program is an offshoot of the
better-known SBA 7(a) program, which offers small
businesses SBA-backed funding in amounts up to
$5 million dollars. Both the traditional 7(a) funding
and SLA loans allow approved borrowers to use the
proceeds of the loans to establish a new business,
acquire assets, including real estate, expand operation,
or fund working capital. The SLA program is
governed by the same regulations as the 7(a) program
and has many of the same advantages. It is generally
easier to qualify for SBA loans, the loans have longer
terms, and borrowers can roll in the fees and costs
of the loan into the loan itself. Specifically for the
SLA program, the application process has been
streamlined to make these loans more efficient for
both banks and borrowers. The program allows
lenders to get a prequalification from SBA to ensure
that the business has enough creditworthiness to
justify giving the applicant full consideration for
financing. In short, the SLA program offers faster
and more cost-effective SBA loans to business borrowers.
Additionally, although the loans can be as high
as $350,000, many of the offering banks offer very
low minimum amounts. We have seen minimum
loans as low as $10,000.
In order to obtain an SLA loan the borrower must
first apply through an SBA-approved lender. A list of
SBA-approved lenders can be found on the SBA
website at http://www.sba.gov. If the pre-qualification
comes back positive for the borrower, the lender
can then push forward with a formal request to the
SBA for a loan guaranty. Most SLA loans will be approved
in a matter of minutes through electronic
submission to the SBA. For those loans not eligible
for electronic submission, the approval process
is between five and ten days. The SBA will guarantee
85 percent of the SLA loan amount up to $150,000
and 75 percent of the loan amount up to $350,000,
as compared to regular 7(a) loans which only
get a 75 percent guaranty no matter the amount. With
a higher guaranty incentive, lenders are more willing
to participate in the SLA program and lend lower
amounts to businesses in need.
SLA loans, like 7(a) loans, cannot be used to
refinance existing debt where the lender is more likely
to sustain a loss, or to effect a partial change of business
ownership or a change that will not benefit the
business. If you think your small business is eligible
for an SLA loan or a 7(a) loan, one of the offering banks
will be able to provide more information on the
approval process and eligibility requirements. For
more information on the Small Loan Advantage
Program and 7(a) loans visit the Small Business Administration
online at http://www.sba.gov.
Business Insights is hosted by the Law Firm of Kumar, Prabhu,
Patel & Banerjee, LLC. Sonjui L. Kumar is a corporate, transactional attorney
and a founding
partner of KPPB Law.
She primarily focuses on serving as general
counsel to privately held companies assisting
them with all legal matters, including corporate
governance, contracts, shareholder matters,
mergers, and acquisitions.
Disclaimer: This article is for general information
purposes only, and does not constitute
legal, tax, or other professional advice.