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Loans and Debt

Loan amortization​

Loan amortization is the process of spreading out a loan (such as a mortgage or car loan) over a period of time by making regular payments that include both principal and interest. Each payment made reduces the loan balance by a portion of the principal amount, while also paying the interest that has accrued on the outstanding balance.

The loan amortization process is typically structured so that the borrower pays off the loan balance gradually over the life of the loan. This is usually accomplished by dividing the total loan amount by the number of payments to be made over the loan term, and then calculating each payment to include both principal and interest. The exact amount of the payment will depend on the interest rate, the loan amount, and the length of the loan term.

The amortization schedule is a table that shows the breakdown of each payment, including the amount of interest and principal paid, the remaining loan balance, and the total interest paid over the life of the loan. The schedule can be helpful for borrowers to understand how much of their payment goes towards the principal balance and how much goes towards interest, as well as how long it will take to pay off the loan in full.

Loan amortization is an important concept to understand when taking out any type of loan, as it can impact the total amount of interest paid over the life of the loan and the length of time it takes to pay off the loan.

SBA 7(a) loan​

The SBA 7(a) loan is the U.S. Small Business Administration's primary program for helping startup, newly established, and growing small businesses. These loans are provided by participating lenders, such as banks and credit unions, and are partially guaranteed by the SBA. This guarantee reduces the risk for lenders, making them more willing to lend to small businesses that might not otherwise qualify for conventional financing.

Here's a breakdown of key aspects of SBA 7(a) loans:

What the Loan Can Be Used For:

SBA 7(a) loans are versatile and can be used for a wide range of business purposes, including:

  • Working Capital: Covering day-to-day operating expenses.
  • Equipment Purchase: Buying machinery, vehicles, and other equipment.
  • Real Estate: Acquiring, refinancing, or improving commercial real estate.
  • Debt Refinancing: Consolidating existing business debts.
  • Business Acquisition: Purchasing an existing business.
  • Inventory: Funding the purchase of inventory.
  • Leasehold Improvements: Renovating or improving a leased business space.
  • Furniture and Fixtures: Purchasing necessary furnishings for the business.

Loan Amounts and Terms:

  • Maximum Loan Amount: Generally up to \$5 million. However, for specific loan types like SBA Express and Export Express, the maximum can be lower (\$500,000).
  • SBA Guarantee: The SBA guarantees a portion of the loan to the lender. For loans of \$150,000 or less, the guarantee can be up to 85%. For loans greater than \$150,000, the guarantee is typically up to 75%.
  • Repayment Terms: The terms vary depending on the loan's purpose:
    • Working Capital: Up to 10 years.
    • Real Estate: Up to 25 years.
    • Equipment: Typically tied to the useful life of the equipment, up to 10 years (with a possible 12-month extension for installation).
  • Interest Rates: Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are tied to a base rate (like the prime rate). Rates can be fixed or variable.

Eligibility Requirements:

While specific requirements can vary by lender, the SBA generally requires borrowers to meet the following criteria:

  • For-profit Business: The business must operate for profit. Non-profits are generally not eligible.
  • Small Business: The business must meet the SBA's definition of a small business, which varies by industry.
  • U.S. Operation: The business must be located and operate within the United States or its territories.
  • Creditworthiness: The borrower must demonstrate a reasonable ability to repay the loan and have an acceptable credit history (personal credit scores often need to be 660 or higher, and some lenders may have higher requirements).
  • No Alternative Financing: The borrower must be unable to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources.
  • Sound Business Purpose: The borrower must demonstrate a clear need for the loan and how the funds will be used for a sound business purpose.
  • Owner Equity/Down Payment: While some loans may qualify for 100% financing (especially for expansion), others, particularly for startups or business acquisitions, may require a down payment (often in the range of 10-20%).
  • Personal Guarantee: Owners with a 20% or greater stake in the business are typically required to provide a personal guarantee.
  • Collateral: While the SBA is more flexible than conventional lenders regarding collateral, it's often required, especially for larger loan amounts. Lenders may require you to pledge business assets or even personal assets as collateral.

How to Apply:

  1. Find an SBA-Approved Lender: SBA loans are not provided directly by the SBA. You need to apply through a participating lender (banks, credit unions, etc.). You can use the SBA's Lender Match tool on their website to find lenders in your area. It's often beneficial to contact lenders with experience in issuing SBA 7(a) loans.
  2. Prepare Your Documents: The lender will guide you on the specific documents needed, but common requirements include:
    • SBA Form 1919 (Borrower Information Form)
    • Personal Financial Statement (SBA Form 413)
    • Personal Background and Credit History (SBA Form 912)
    • Business Financial Statements (balance sheets, profit and loss statements, projections)
    • Business Tax Returns (personal and business for the last 2-3 years)
    • Business Plan
    • Loan Application History
    • Business License and Registration
    • Resumes of Business Owners
    • Details on the Use of Funds
    • Collateral Information
  3. Submit Your Application: Work closely with your chosen lender to ensure your application is complete and accurate.
  4. Underwriting and Approval: The lender will review your application and may need to get approval from the SBA, depending on the lender's status (e.g., Preferred Lender Program (PLP) lenders may have more autonomy).
  5. Loan Closing: Once approved, you'll work with the lender to finalize the loan documents and close on the loan.
  6. Funds Disbursal and Repayment: After closing, the funds will be disbursed, and you'll begin making payments according to the agreed-upon terms.

Important Considerations:

  • Fees: Lenders may charge packaging and other service fees, which are often passed on to the borrower. The SBA also charges lenders a guarantee fee, which can also be passed on to the borrower. Prepayment penalties may apply in certain situations for loans with longer maturities.
  • Timeline: The application and funding process can take time, often ranging from 60 to 90 days, but it can vary depending on the lender and the complexity of the loan.
  • Personal Guarantee and Collateral: Be prepared to provide a personal guarantee and potentially collateral, as these are common requirements for SBA 7(a) loans.

SBA 7(a) loans can be a valuable resource for small businesses, offering favorable terms and access to capital that might otherwise be unavailable. However, it's crucial to understand the eligibility requirements and the application process to determine if it's the right financing option for your business needs.