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Here are some Frequently Asked Questions about SBA loans.

 

 

SBA Myths

There are several myths connected with the SBA Program, such as:

  • It takes 6 to 9 months to get funded.
  • Dealing with the Federal Government means too much red tape, too many strings attached.
  • You have to belong to an ethnic minority to get an SBA Loan.
  • You must be turned down by 2 banks prior to applying for an SBA loan.
  • You must have Real Estate to Pledge.

Let's separate myths and facts.

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Processing time can take as little as 15 days.   Loan Funding within 30 days.

Some of our applicants saw their money in as little as 15 days, and some cases took up to 45 days, depending of course upon the complexity of the loan application just like with a regular commercial loan. 

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There is not much red tape involved, or many strings attached.

Applying for an SBA Loan requires the same documentation as a regular commercial or real estate loan.  In the past, however, many banks were quite frivolous in their loan application process which made for an "easy" application. With recent regulations this practice has stopped, and commercial loans now require much more documentation.  Because the SBA has had a due diligence loan procedure in place all along, the SBA program has managed to stay very successful, and it continues to support small business lending.

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You do not have to be a minority to get an SBA Loan.

The U.S. Government does not discriminate against anybody. This myth dates back to the days when the SBA used to make "direct loans" to minorities in order to help the nation's minority business communities. This program has long been abandoned and replaced with the current "Guaranteed Loan Program" which has been very successful in helping all small business owners.

Under the Guaranteed Loan Program, if a bank approves a loan and the applicant qualifies under the SBA Guidelines, the SBA will guarantee the loan to the bank. Note that the SBA does not fund these loans, but guarantees between 75-85% of the full loan amount to the bank, while it is the bank that actually funds the loan.

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You do not have to be turned down by a lender to get an SBA Loan.

The myth that an applicant has to be turned down by a lender is not true. The SBA is there to assist Small Business in providing capital on reasonable terms and conditions when a business cannot find other sources.

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Who can qualify for an SBA Loan?

A business must be independently owned and operated for profit. It must not be dominant in its field, and must meet certain criteria in terms of size, number of employees, and annual sales. Loans cannot be made to speculative businesses, media businesses, or businesses engaged in gambling activities.

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What is considered a small business?

Over 90% of the nation's companies are classified as "small" by SBA size standards, with limitations on dollar volume and number of employees set according to industry. Almost every type of business qualifies for an SBA Guaranteed Loan. The following is an excerpt from the guidelines published by the US. Small Business Administration

Manufacturing: Maximum number of employees may range from 500 to 1,000 depending on which industry the business is in.

Wholesale: Number of employees must not exceed 100.

Services: Annual sales must not exceed $6 to $25 Million depending on the industry.

Retailing: Annual sales must not exceed $6 to $25 Million depending on the industry.

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What can the funds from a loan be used for, and for how long?

Whether the applicant already owns a business, is starting, expanding or purchasing a business, he/she can use the funds for the following purposes:

  • To purchase real estate or make improvements on one's business property. This loan will have an amortization period of up to 25 years.
  • To purchase equipment, consolidate debt or purchase another business, and for leasehold improvements on leased property. The term for these loans will be up to 10 years, fully amortized.
  • To purchase inventory or to provide working capital. The term for these loans will be 7 years, fully amortized.

When a business is requesting funds to be used for a number of different purposes the term of the loan will be a blended term.

Obviously, if the business is very successful and the owner wants to pay off the principal balance earlier, one may do so. There is never a prepayment penalty on SBA Loan of 15 years or less.

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What are the costs involved with an SBA Loan?

The interest rate on an SBA Loan is normally a variable rate.  It is tied to the New York Prime Rate, adjusting quarterly in most cases. The margin is determined by the lender. However, the SBA forbids the margin to exceed 2.75% over the prime rate. The SBA precludes lenders from charging any lender points to originate or service the loan. SBA charges a one time guarantee fee based on the dollar amount of the loan. The fee ranges between 2.0% and 3.5% on the guaranteed portion of the loan. This fee is paid by the borrower directly to the SBA upon loan funding. 

The applicant will be charged fees for consulting, loan processing and recording fees.  If applicable any fees in connection with appraisals and title insurance will also be paid for by the borrower. 

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How much can a business borrow?

There is no minimum amount the SBA will guarantee. By law, the SBA maximum guarantee is $1,000,000. The total loan amount you can borrow under the SBA program is $2,000,000.

At DGH Financial Services, Inc.  We have lenders that will take a higher risk than their normal 25% share and will lend more than $2,000,000 with a lower guarantee percentage from the SBA, depending on the borrower's qualifications. 

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What are the basic requirements?

The basic requirements for an SBA Loan applicant are as follows:

  • Credit Reports on the existing business and individual owners must be satisfactory. If derogatory items exist, it does not necessarily mean that the applicant is disqualified, as long as a good explanation can be supplied.
  • Management Experience.  The applicant should be experienced.
  • Repayment.  The business must demonstrate the ability to repay the SBA loan and any other business obligations out of the business profits.
  • SBA requires a 10%-20% down payment/cash injection for Real Estate purchase, and at least 30% on the purchase of a business. In case of a start-up, the SBA requires that at least 33% of the total project cost be contributed by the borrower. The source of down payment needs to be verified and provided from non-borrowed funds. Should borrowed funds be used, then the terms and conditions of such funds have to be disclosed.
  • Collateral.  The loan must be reasonably secured to assure its repayment. In other words, there should be sufficient collateral to cover the loan amount in case of default. Lack of collateral, however, is not a determining factor in denying a loan; although if an applicant does have assets the SBA may ask them to be pledged.

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Why Finance Equipment with an SBA Loan?

With an SBA loan a business can finance 100% of the equipment cost (including installation costs) whereas equipment leasing companies do not cover any installation costs associated with the leased equipment.  Very rarely do leasing companies or commercial lenders provide a fully amortized loan over 10 years. Additionally and most important, the SBA loan does not carry a pre-payment penalty. 

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Can SBA Loans Be Used To Refinance Business Debt?

The answer is: Yes! Under the following conditions:

  • SBA requires proof that the original loan (which may since have been refinanced or renewed) and subsequent financing were used for a valid business purpose.
  • The Note has to be fully secured.
  • We have to demonstrate a tangible business benefit from refinancing the existing debt.

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Can SBA Loans Be Used For Working Capital?

Yes.  The most needed business financing, but the one most misunderstood by business owners, is the Working Capital loan.

The two distinct types of working capital loans are:

  • Conventional lines of credit, whether secured or unsecured, used for seasonal peaks and valleys, for increased sales with corresponding receivables, or for projects that are bigger or larger in scope than the business can handle with current cash flow. These working capital loans are normally paid back by the business through liquidation of assets, i.e., A/R, contracts completed and paid, etc., and are normally not handled by SBA loans, however in some cases the loan would qualify.
  • Another type of working capital loan, which the SBA will consider, is the term loan used for business expansion. These are funds needed to finance additional inventory, a second location, a new line of products, additional personnel to provide services, etc. These loans are paid off through increased profits from the expansion activities.

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Business Purchase Loans

Yes, you can acquire a business with an SBA loan.  It can be used to purchase the assets of an existing business. Please consult our Business Acquisition Page.

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Business Start-Up Loans

While many commercial banks shun loans for start-up operations it is the SBA's mission to assist such ventures. There are several requirements for qualification:

  • The borrower must have experience in the line of business;
  • The borrower's cash injection must be at least 33% of the total project cost; and
  • The borrower must provide some collateral for the loan portion of the total project cost.

Business start-up loans can be used for the following:

  • Building;
  • Building improvements;
  • Machinery and Equipment;
  • Furniture and Fixtures;
  • Inventory; and
  • Working capital.

Please Consult our Start-Up Page for Details.

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Why Finance  Owner Occupied Real Estate with SBA Loans?

Longer Terms, Smaller Down Payment, Easier to Qualify. Please Consult our Real Estate Page for details.

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Can I refinance my commercial/industrial property with an SBA Loan?

Yes.  If your original property loan included a balloon payment or the interest rate is excessively high, an SBA loan can be used to refinance your mortgage Note on a long term basis. We must be able to verify that the entire loan to be refinanced was used to purchase the subject property and the property was and is not being used in any way for investment or speculative purposes. Also, the balloon payment coming due must be occurring within a reasonably short period of time.


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What kind of property can I purchase?

You can purchase any kind of property as long as it is for business use. The building can be either an Industrial or Commercial Building, a Retail Shop, Office Condominium, or even a single purpose property (such as a Gas Station, Car Wash, Motel, Restaurant, etc.).

Two very important facts: The business must occupy at least 51% of the property if the property is being purchased and 60% if the loan is being used to construct a building.

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Can SBA financing be used to purchase land?

Yes.  As long as the property will be used for business purposes, now or in the near future, you may purchase raw land with SBA loan proceeds. Examples for this type of use could be businesses that need the land to store equipment, vehicles or bulky types of inventory. A business might need the land for a parking structure, or quite simply construction might not take place for awhile.

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Can SBA financing be used for construction?

Yes.  As long as the business will occupy at least 60% of the total building size, you can use SBA loan proceeds for construction. The construction loan can be structured with interest only payments during the construction phase, and then convert over to a permanent loan for a period of 25 years, fully amortized at the completion of the project.  See Real Estate Page for Details.

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What is the procedure for SBA Loan approval?

These are the steps for SBA Loan approval:

  • Initial interview: with borrower to determine the feasibility of the proposal and to ensure that it meets the SBA's and the lender's guidelines.  This is offered by us free of charge.
  • Additional Documentation: after initial Pre-Qualification, we will request more detailed financial information, such as tax returns, financial statements, and credit reports.  This is also offered by us free of charge. 
  • Preliminary Bank Approval: of the loan is obtained and the bank issues a letter of intent subject to verification of financial data and appraisals.
  • Loan packaging: After the letter of intent is issued by the lender, DGH Financial Services, Inc. will assemble the loan package.  
  • Submission To Bank: for Final Bank Approval.
  • Submission To The SBA: for SBA concurrence and approval.
  • Funding:  After the loan is approved by the SBA, closing documentation will be prepared.  The applicant will sign all documents at the lender, and the loan will be funded.

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How does DGH Financial Services, Inc. compare to a Direct SBA Lender?

Comparison of DGH vs. Direct SBA Lender

DGH Financial Services
Geographic Area
All of Southern California directly
--Nationwide on line
Type of Business
We will arrange a loan to any business in any industry as long as it qualifies under SBA guidelines.
Lending Guidelines
DGH will process a loan as long as it qualifies under SBA guidelines
Response Time
Initial approval - 48 hours
Letter of intent - 3-5 working days
Loan Cost
Case by Case basis
Term
Most Competitive
Interest Rate
Most Competitive
Other SBA Lenders
Geographic Area
Most banks cover a limited area in their operation, very few cover all of the Nation.
Type of Business
Most banks have their own guidelines and your business may not fit those guidelines.
Lending Guidelines
Some lenders may have local arbitrary lending guidelines
Response Time
Initial approval - Varies
Bank letter - Varies
Funding - Varies
Loan Cost
Case by Case basis
Term
Term of loan is predicated on use of funds and is set by SBA guidelines
Interest Rate
Interest rate cannot exceed prime + 2.75% but may be lower
 

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Why you should work with DGH Financial Services, Inc.:

Since 1990, our friendly staff of Small Business experts have been assisting many companies like yours expand and prosper by securing strategic financing designed for success.  Our officers are dedicated professionals who are interested in your financial needs and have the experience and resources to meet all of your demanding requirements.

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How Do I Get Started?

You can call DGH Financial Services, Inc. at 818-998-3224 for straight answers and quick decisions.  You may also Email us at dgh@sba4you.com.  Or if you choose, you can fill in our online application.

 

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