Also check out Sample Trademark
Seller Financing refers to buying a business that has already been established. With the elimination of early startup costs, you would already tap into an enterprise that has a recognized customer base, employees, overhead, and inventory. Specifically, seller financing is the means of financing in which you do not purchase the entire business up front; rather, this type of financing means paying small monthly payments to the seller of the business, similar to the way you would make loan payments to a bank.
Traditional Bank Loans, as the name implies, are loans given directly from a bank. Unlike Lines of Credit (LOC), they are given in lump-sum amounts which means the borrower is required to pay interest on the entire amount, regardless of whether the funds are used for purchases.
Bank loans typically fund larger amounts than those offered through SBA loans. They are most often used by mature companies because they are document intensive, requiring good credit and an operating history of at least 3 years; additionally, the loan must be secured with collateral such as property or equipment which is why typically only more mature companies qualify. Traditional bank loans also often have restrictions on how the funds can be used.
The advantage of traditional bank loans, if one can qualify, is how the low interest rate is when bank risks are mitigated by collateral and thorough credit history requirements. However, rates can be more variable than government back loans as they vary based on personal credit history, financial analysis of the company, and the current economic climate.
The US Small Business Administration (SBA) is an important resource for small businesses. SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing. In this post we will talk about the different financial assistance programs that the SBA offers. If your startup needs a business plan, our Level 2 Business Plans are written specifically to meet the SBA’s requirements for funding.
1. 7(a) Loan Program: The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. The 7a loans were created to help businesses with special requirements. The programs encompass express loans, loans for exporters, loans for small and rural communities, seasonal funding loans, and loans for borrowing cost fees.
For the 7a loans, SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7(a) loans are the most basic and most commonly used type of loans and they are also the most flexible, since financing can be guaranteed for a variety of general business purposes. Most American banks participate in the program, as do some non-bank lenders, which expands the availability of loans. Participating lenders agree to structure loans according to SBA’s requirements, and apply and receive a guaranty from SBA on a portion of this loan.
2. CDC/504 Loan Program: The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides small businesses requiring “brick and mortar” financing with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. For the 504 loans, 50% of funding is contributed by the bank or private sector lender, 40% is provided by a CDC, and the business owner a 10% equity share.
A Certified Development Company (CDC) is a private, nonprofit corporation set up to contribute to the economic development of its community. CDCs work with SBA and private sector lenders to provide financing to small businesses.
3. Microloan Program: The Microloan Program from the SBA provides short-term funding to businesses by making funds available to non-profit community-based lenders who then make loans to eligible borrowers. The maximum loan amount is $50,000 with the average loan around $13,000.
4. Disaster Loans: Disaster loans are available to businesses and individuals to repair damage to physical property (including real estate, personal property, equipment, inventory and business assets) damaged or destroyed by a declared disaster. Loans are also available to assist business, located in a declared disaster area, who incurred economic injury, regardless of physical damage. SBA Disaster loans also cover personal home and property, and funds for businesses unable to meet operating expenses because an essential member was called-up for duty.
A trust is a legal construct in which one person (the trustee) holds legal title to property previously owned (by the settlor) for the benefit of another (the beneficiary).
A non-profit can exist as a trust, when the trustee is under the obligation to use or hold the property for a charitable purpose.
A non-profit can also be named as the beneficiary to a trust, when the settlor makes a Planned Gift.
The SBA micro-loan program makes funding available to intermediary, non-profit lenders who, in turn, make micro loans available to small business borrowers. The maximum loan amount is $50,000, with a maximum term of 6 years at varying rates between 8 and 13 percent depending on intermediary costs. Funds from a microloan can be used for working capital and purchase of assets, but cannot be used to pay existing debts or for real estate purchases. In addition, the intermediary lenders of microloans provide educational and training assistance to borrowers, and in some cases participation in training education is required.
Lending and credit requirements vary by intermediary, though typically collateral and personal guarantee for the owner is required.
Disaster Program loans are made available through the SBA for business owners as well as homeowners and renters who have been harmed in a declared disaster. For businesses, loans are available for physical damage to property suffered in a disaster. This includes actual property as well as machinery and equipment, fixtures, and inventory. Additional funds, up to an additional 20% of the loan value, are available to protect property from potentially similar future disasters. These loans are available regardless of whether or not the property was insured.
The SBA also provides loans based on economic injury related to a declared disaster. This loan is available regardless of whether or not any physical damage occurred. The SBA considers economic injury and inability to pay operating costs or meet its financial obligations.
The maximum amount available from these loans is $2 million. The length of term of these loans can be up to 30 years for repayment and interest rates are variable depending availability of alternative sources of funding. The SBA rates specify in cases where alternative funding sources are not available; loan interest rates reach a maximum of 4%. In cases where alternative funding is available, the interest rate ceiling increases to 8%.
The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7a loans are designed to help business with special requirements.
Types of 7a Loans
• Express Programs: SBA’s Express programs offer streamlined and expedited loan procedures for particular groups of borrowers. The express programs are made up of the SBA Express, the Patriot Express, and the Export Express Loan Programs (listed as part of the Export Loan Programs).
• Export Loan Programs: SBA has placed a priority on helping small business exporters—some 70 percent of all U.S. exporters have 20 or fewer employees—with a number of loan programs specifically designed to help them develop or expand their export activities. These loan programs include the Export Working Capital Loan, the Export Express Loan, and the International Trade Loan
• Advantage and Rural Loan Programs: The Small/Rural Lender Advantage (S/RLA) initiative is designed to accommodate the unique loan processing needs of small community/rural-based lenders by simplifying and streamlining loan application process and procedures. These include the Small Loan Advantage, Community Advantage loans, Rural Lender Advantage, and the B&I Guaranteed Loan.
• Special Purpose Loan Programs: Specialty purpose Loans are designed to assist those businesses affected by NAFTA, developing Employee Stock Ownership Plans, and implementing pollution control measures. The Specialty purpose loans include the CAIP loan for borrowing costs and the CAPlines for seasonal funding needs as well as Pollution Control and Employee Trusts Loans.
What Banks Are Looking For
To be considered for a 7(a) loan, applicants must meet certain eligibility requirements. These requirements are designed to be as broad as possible so the program can accommodate the most diverse variety of small business financing needs. First, your startup must operate as a for profit company and do business in the United States or its possessions. Your entrepreneurial venture must also meet SBA size standards and not have any funds available from other sources. You, the entrepreneur, must have what the SBA determines as “good character”, management expertise, and the ability to pay the loan on time. A strong business plan is recommended as well.
Specialty purpose Loans are designed to assist those businesses that have been affected by NAFTA, have cyclical financing needs, are developing Employee Stock Ownership Plans (ESOPs), or are implementing pollution control measures. In addition, The SBA special purpose loans offer floor plan pricing loans against business inventory in the event the inventory can be used as collateral.
1. CapLine loans were developed to help businesses with cyclical and short-term working capital needs in cases such as seasonal work or construction. The program provides businesses with a revolving line of credit with a maximum loan limit of $5 million as of 2010. The SBA provides loaning institutions up to an 85% guarantee on the amount of the loan.
Within the CapLine loan there are 4 specialized loans available:
a. Contract Loan Program: Designed for businesses that have secured a specific contract but are in need of financing for material, labor, overhead etc.
b. Seasonal Line of Credit Program: Designed to help cover costs associated with above normal usage for seasonal inventory.
c. Builders Line Program: Used by small contractors or developers for residential or commercial property
d. Working Capital Line Program: provides revolving line of credit for short-term working capital
2. CAIP (Community Adjustment and Investment Program) was developed to aid companies negatively impacted by NAFTA. Its main impact is to assist with payment on fees related to borrowing costs such as lender and guarantee fees.
3. Pollution Control is provided for businesses making changes to a facility to control impact from pollution. The funds are restricted for use on fixed assets only. As of 2012, the program was non-operational due to lack of appropriations.
4. Employee Trusts provides assistance to Employee Stock Ownership Plans. The maximum loan amount is $2 million with the SBA guarantying between 75 and 85 percent depending on the size of the loan. Businesses are required to meet the requirements for Employee Stock Ownership Plan as prescribed by the IRS, Treasure, and Department of Labor regulations.
5. Dealer Floor Plan Pricing is made available to borrowers based borrowing against retail inventory as collateral. The loan utilizes a revolving line of credit allowing borrowers to purchase inventory using credit, but are required to pay back the loan as inventory is sold. This allows business owners to purchase on-hand inventory.
The express loan programs were designed streamline the lending process for quick turn-around loans for particular groups of borrowers. The SBA also makes lower interest rates available to Express loan borrowers.
1. SBA Express Loans are designed for small business owners. The estimated response time to the application process is within 36 hours.
2. Patriot Express Loans are made available to veterans and active-duty service members to start or expand a small business. These loans secure the lowest interest rates available ranging from 2.25 – 4.75 percent over prime depending on amount and duration.
3. Export Express – see SBA Loans – 7a – Export