Written by: Mark J. Krupp, Cofounder of NewBusinessCreator.com
SBA loans are an excellent source of business funding if you want to either acquire a medical practice, modernize or expand your office or acquire equipment. SBA loans typically have better interest rates and terms compared to conventional loans because they are guaranteed by the Small Business Administration. The kind of SBA loan you apply for is dependent upon several different issues. There are currently two major choices of SBA loans, SBA 7(a) loans and SBA 504 loans, which are administered and secured by the SBA. Listed below are a list of basic questions you must ask yourself to determine what kind of SBA loan you should submit an application for:
1.Are you utilizing the debt financing for buying a medical practice or for purchasing an existing practice?
SBA 7(a) loans are much more ideal for starting a new business or for purchasing a business. The primary reason for this is mainly because SBA 7(a) loans can be utilized to purchase inventory and goodwill. In a practice sale, goodwill is often one of the primary items you are acquiring. Unfortunately, 504 loans cannot be used to acquire inventory or for acquiring goodwill.
2.Are you utilizing the debt financing for growth, remodeling or for purchasing major equipment, or is the principle purpose of the loan for starting or buying a practice?
SBA 504 loans were mainly designed to enable established businesses to improve and grow. Therefore, they are often used to purchase commercial real estate. They can also be utilized for building remodeling, landscaping or putting in utilities. Additionally, 504 loans are frequently used to purchase equipment and machinery. The only stipulation the SBA makes with regards to utilizing 504 loans for acquiring equipment is that it has to have an expected lifespan of ten years or more.
SBA 7(a) loans are intended to help encourage small business development. Therefore, the SBA is much more flexible regarding what 7(a) loans can be used for. Just like 504 SBA loans, 7(a) loans can be used to purchase real estate and equipment. Where 7(a) loans differ from 504 loans is that they can be used to buy inventory, goodwill and also for supplying working capital, where 504 loans cannot.
3.How much capital are you trying to borrow?
The maximum loan amount for SBA 7(a) loan is $5 million. With 7(a) loans, the SBA guarantees 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. For example, in the case of an SBA 7(a) loan for $5 million, the Small Business Administration guarantees $3,750,000 or 75% of the loan.
In contrast SBA 604 loans are a hybrid loan. Part of the funding is a 504 loan that is secured by the SBA and the other part is a private conventional loan. Since there is no upper limit to the conventional loan financing, there isn’t any maximum with regards to the total amount that may be borrowed. Nevertheless, the Small Business Administration does set a maximum limit to the percentage of the project they’ll finance and to the total amount of funding they will guarantee. SBA 504 loans guarantee to 40% of a project’s capital requirements with a maximum of $5 million in financing for standard projects and up to $5.5 million for green initiative business financing and small manufacturer projects. When you obtain a SBA 504 loan, up to forty percent of the overall financing is a 504 loan which comes from a Certified Development Company (CDC). A private lender supplies 50%, and the borrower is usually expected to provide the remaining 10%. Certified Development Companies (CDCs) are nonprofit corporations that are certified and regulated by the Small Business Administration. CDCs partner with participating loan providers to provide financing to small businesses. CDCs raise capital for financing 504 loans by holding monthly bond auctions that are 100% guaranteed by the SBA.
In conclusion, an SBA (7a) loan is generally the preferred choice for physicians that are looking for debt financing. The primary reason for this is because SBA 7(a) loans offer a great deal more flexibility with regards to what the loan may be used for. If you intend to utilize an SBA loan to buy a practice, or to start one from scratch, an SBA 7(a) loan is by far your best option.
It’s important to be aware that you don’t apply to the Small Business Administration for an SBA loan. SBA loans are instead distributed by banks and other special finance companies. In the past, community banks were the main providers of SBA loans. Regrettably, numerous community banks have gone out of business over the last twenty years. Therefore, this source of SBA loans has drastically declined. At the same time, the large banks that now dominate the banking industry don’t want to hassle with small business financing. Thankfully, this void in small business lending is being rapidly filled by non-bank SBA loan companies. One example of these non-bank SBA lenders is Newtek, the small business authority. Started in 1994, Newtek has become the largest non-bank SBA loan provider in the US. Newtek was also ranked as the 6th largest SBA 7(a) lender of all loan providers, including banks, by the SBA. Newtek ,in most cases,can pre-qualify you for a 7(a) loan for as much as $5 million or as little as fifty thousand dollars within two days. Completing the loan application is simple. Newtek completes all of the SBA loan application paperwork for you.