The Benefits of Small Business Administration Loans

By Steve Dinnen

A full-service restaurant in Urbandale plans to bolster its business with a $1.67 million investment. A child care center, also in Urbandale, will grow with a $1.39 million loan, while a longtime Des Moines accounting firm will spend $1.6 million on an office. These are just three of the recent round of loans to Central Iowa businesses that are backed by guarantees from the U.S. Small Business Administration—$8.3 million in September alone (and $21.2 million statewide).

There could be an SBA loan waiting for you. But first you have to ask. And you have to understand how they work. For that, we turned to Jim Langin (pictured above), of Pivotal Business Partners, and Evan Muench (pictured below), of HL Lender Resources. They and their West Des Moines firms specialize in guiding both borrowers and lenders through the process.

According to Langin, SBA loans come in two forms, the 504 and the 7(a). The 504 is meant to finance real estate and heavy equipment purchases. The more common 7(a) is intended for working capital and can be used for startup funding, business acquisition or even debt refinancing.

 

Borrowers have to meet basic requirements such as being a for-profit firm, with equity in the business, and meet size requirements. If they are large enough to have in-house staffers with familiarity of the SBA loan process, lenders will do their own underwriting of a loan, while smaller banks may turn to advisers such as Langin and Muench for guidance. (Langin noted that HL was founded by two top Iowa SBA officers—one of them was his father, John Langin—so they have deep roots in the SBA world.)

Lenders see an SBA loan as a useful tool, Langin said, because it “allows them to do things their loan policy won’t cover.” That might include the lowered borrower buy-in on a 504 loan, which typically is structured so that the borrower puts up 10% of the needed funds, just half the amount a non-SBA loan would require. So that ties up less of the borrower’s money. A borrower on a 504 loan also benefits by locking in a fixed interest rate for a portion of the loan, for as long as 25 years.

The current interest rate on a 504 loan with a 25-year payback is 6.529%. A 7(a) loan costs prime—currently 7%—plus 0.5% to 2.25%, for 7.5% to 9.25%.

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