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Basic Characteristics Of 7(A) And 504 SBA Loans: Know Them Well!

The Small Business Administration (SBA) can guarantee up to 85% of a loan, and in 2011 the SBA approved a record $19.6 Billion in loans just in the more popular type of loan, of which $1.5 Billion went to franchises, as the SBA works closely with such entities like the International Franchise Association. The SBA has also proclaimed that as of February 15, 2012, $50 Billion has been poured into the other type of loan, creating over 2 Million Jobs. Indeed, the features of SBA loans can be quite enticing in terms of the present credit crunch.

There are basically two types of loans, the 7(a) and the 504, which have had their limits increased from $2 Million to $5 Million.

The maximum in business net worth has also been raised to $15 Million, and average after tax net income or $5 Million or less is allowed.

The best way to gather information and get assistance on how to navigate the SBA rules is through Community Development Corporations (CDCs) that are dotted across the country.

Features Of 7(A) SBA Loans:

This loan carries a floating rate but is much more flexible in terms of use of funds. Soft costs such as franchise fees can be rolled into the loan. Applicants are required to take an active role in the business and furthermore may also be required to put up substantial collateral, even personal collateral if the business does not have enough capital to support the collateral requirements.

Credit checks are usually performed on all business participants and a down payment of as high as 30% is sometimes required. The SBA has also just started a Community Advantage program that now allows nonprofit entities to participate as mission based lenders, widening the pool of lenders even further.

Features Of 504 SBA Loans:

The 504 loan is designed for the purchase of fixed assets such commercial property, major equipment, or facility expansion, and carries a fixed rate for 10 or 20 year loans. This loan has increasingly become more popular in the acquisition of commercial property as the terms are very advantageous. It is basically two loans in one, the first lien being provided by a commercial lender at 50% of the project cost, the second lien provided by the SBA at 40%, with the applicant only having to put up 10% out of pocket, although it may go as high as 20% under certain circumstances. The major benefit of the 504 loan is how the 10% down payment is calculated, as it is based on the total project costs, as opposed to being based on the purchase price. The Small Business Jobs Act of 2011 furthermore allows the use of 504 loans to refinance up to 90% of commercial mortgages, and $7.5 Billion has been approved, but this program is due to expire on September 27, 2012.

As you can see, the features of SBA loans have been liberalized extensively in the past few years, and may be worth consideration, especially if you are considering investing into a franchise.

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