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In this video, I will show you everything you need to know about the very popular 7(a) loan program with the SBA, and why this may be a great option for you if you’re looking to raise capital for your business.

Hey everybody, welcome to my channel. I am your host, Leo Landaverde, business coach and outsourced CFO, helping you scale your business. If you’re ready to grow your business to seven figures and beyond while creating the financial freedom and the lifestyle you want, then subscribe to this channel. Don’t forget to hit the bell, and you’ll be notified every time new content comes out.

Here are the top three reasons why you should consider the 7(a) loan program for your business. Number one, very low interest rates. Number two, loan repayment terms. And, number three, no collateral, which is great. Let’s dive into it.

Hey, thanks again for watching today’s video. We’re going to do a deeper dive. We’re going to start with … As I mentioned, the three big things that you need to know about the SBA 7(a) loan program is super low interest rates, loan repayment terms, and no collateral.

This is what it looks like from a type of grid that is put out by the SBA. You can borrow up to $5 million with a 7(a) loan program. In fact, the 7(a) loan program is sometimes used to purchase commercial real estate. Sometimes there’s confusion between the 504 program that I did last week that is specifically for real estate and heavy equipment. That is favored more for real estate. The 7(a) loan program, that has more of a greater variety of uses.

The thing is, you have choices. I will do a video next week in which I compare the 504 program and the 7(a) program, and the pros and cons. But I definitely will tell you, we’ll say why the 504 is better for real estate. But, for the sake of this video, it’s about the 7(a) loan program. You can get up to $5 million. You can have up to 10 years to repay most loans, and up to 25 years on a commercial real estate purchase or construction. It works for both.

The maximum base rate, which is prime, right now is 3.25, 4.75 for variable rate loans, which, you have a choice between a variable rate and a fixed rate. Prime rate plus 6%, plus 2%. If you’re looking at 3.25 plus 6%, 9.25, 11.5 for fixed rate loans. That’s very, very low, and competitive if you go to conventional lending, which is very, very tight right now. If you’re watching this video right now, which is in 2020 where we are going through a global pandemic, COVID-19, keep that in mind.

There are guaranteed fees when you deal with the SBA. We’re going to talk about the good, the bad, and the ugly. What guarantee fee means, that there is a fee that is charged by the SBA to you. But, for the purposes of assuring that the lender that gave you the loan, that if you default on the loan, they will be made whole, which is … I call it a win-win-win. It’s a win for you because you get the money. It’s a win for the lender because it eases off the restrictions for you to apply for a loan. It’s a win for the SBA because it makes the economy go ’round. But, you need to know that.

There are other loan fees. Prepayment penalties may apply. Usually the prepayment penalties are within the first three years of the loan. It depends on the size of the loan, the repayment terms, but there will be some type of prepayment penalty that you would have to deal with.

You’ve got to look at all the fine print, the processing fees, origination fees, application fees, points, brokerage fees. If you’re having someone like me that helps you through the whole process, of course there’s going to be some type of fee. We try to keep our rates very, very competitive. This is just for your information.

You cannot do a loan now with this without a personal guarantee. This, it goes with whomever you go. I don’t know of any lender out there that actually won’t have you personally guarantee something. If you’re dealing with a traditional bank, a commercial bank, an asset-based lender, or the SBA, there will be personal guarantees. If somebody tells you there’s not a personal guarantee for you, I would look twice at the paperwork.

If you’re dealing with a merchant cash advance, which, really, there’s no interest rate, it’s basically they’re going to give you 100,000 but they’re going to charge you 20,000 to give you a 100,000, they’re going to offset the risk of not having a personal guarantee by charging a whole lot more money because they spent a lot more default. That’s kind of how it works.

With a 7(a) loan program, there are some equity requirements. It’s, again, more to some traditional banking, which means it’s what is called a debt to equity ratio, as you can see here on this section right here. It’s one to three, which means that for every dollar of cash you have invested in the business in your balance sheet, you can have up to $3 worth of loan for new businesses, which is very aggressive, and, for established businesses, one to four.

If you went to your local community bank, they will be very concerned about you getting a loan from them or a line of credit if your debt to equity exceeds three. The SBA will give you up to four, so you can tell that they’re a little more aggressive, because their job is to keep the economy humming along.

There are collateral requirements for some loans. There are two major type of SBA 7(a) loans. It’s the regular 7(a) that goes up to 5 million. There’s the small loan that goes up to 350, which I’m going to show you right now, actually.

If you can look at this grid, it’s actually from the SBA themselves. This is a nice little grid. If you comment, if you need this, I’d be happy to provide you some of this collateral stuff so you can have them. Excuse me. You can see here that there’s multiple loan programs with the SBA, which is really, really cool.

The 7(a) and the 7(a), so you can see that the 7(a) goes up to 5 million, and the 7(a) small loan goes up to 350. But, as you can see, there are guarantees, right? The SBA is guaranteeing the lender or the institution, the bank that gave you the money, that they will be repaid after certain amount.

You can use the proceeds for expansion, renovation, new construction, purchase land, buildings … There’s a whole lot. There’s a whole lot of flexibility. You can use it to refinance debt for some very compelling reasons, which, you’ve going to have to explain that through the underwriting and application process.

Depends. Most loans will go up to … I think the maximum, according to this, is 10 years for anything other than real estate. If it is real estate involved, it’s 25 years. You can see that the maximum interest rates here are, prime, plus 4.25, is the highest that you’re going to see. This is for the smaller loans. The bigger loans will have a smaller interest rate. There’s from zero to seven years. There’s from seven years plus, so seven to 10, seven to 25. If you’re looking at prime, plus 2.75 right now, so that would be 3.25 plus 2.75 as a maximum exposure of 6% APR. That’s pretty awesome for commercial lending. Commercial lending is typically more expensive than residential lending. Be well-informed. Those are the kinds of things that you need to make sure.

In the small loan, that one for 350, you can see here that they say that the guarantees are similar, same as 7(a) loans. The same as 7(a) loans on the use of proceeds. The maturity is same as the regular 7(a) loans. The maximum rates are the same as the 7(a) loans. The guarantees are the same. The big difference is that you are going to get less money, depending on which bucket you go into. That really depends of your ability to repay the loan.

One big concept that you’d have to understand is called debt service coverage ratio, spelled DSCR, which is the cashflow of your business over the loan payments, which is the principal plus interest. That ratio is very important to the SBA and your ability to pay. That’s what dictates how much money you can get.

To keep it simple, if you say you want to apply for a $100,000 loan for your business, you better have 125,000 in net income for your business for the year. Take that 125 over 100, that gives you a 1.25 ratio. I spent quite a bit of time when I worked with businesses helping to understand these concepts. You need to know what they are before you actually apply for a loan.

Now I’m going to go to the actual SBA website right here. Right here,, funding program loans. You can actually see the eligibility requirements for yourself. You could get from five to 5.5 million. As we’re looking at … You can read all about the programs right here and how the whole process works. I don’t expect you to really get everything from watching this video, but I think you need to know that these are the things that you need to know.

You need to be a for-profit business. If you are a nonprofit, if you are a government agency, or a hybrid, or anything other than for profit, this loan is not for you. You must have your main operations in the US. Say you do business outside of the US and you have branches outside of the US, or even in US territories, your main office must be in the US. They will ensure that that’s the case.

Have invested equity. That’s the whole one to four, one to three, every dollar for $3, $4 for every dollar on the equity. This is where it comes into play. Technically they want to know that you exhausted all the … They’re not the first option, but you have already tried to get regular funds from any other financial lender. They’re called the default place. This is the place where you know going to get money, but they don’t want it to be your first choice. There are some rules about that beyond the scope of this video, but just so you’re aware of it.

Now I’m going to show you the three main forms that you’re going to need to fill out for the 7(a) loan. Each loan program has slightly different forms. The 504 has other forms. The 7(a) has their own forms. The SBA express and some of the other loans may have a combination of forms.

The main application is SBA Form 1919, updated … This is the most recent one. To be completed by the sole proprietor, in case you don’t have a corporation and you’re acting with a fictitious business name. If you’re a partnership, all the general partners. If you’re a corporation, whether it’s S or C, anyone who has 20% or more. If you are an officer and you have 20% or more equity ownership, then you will personally guarantee it, and you need to be listed in the application. It can also be filled by any person higher, by the business. You can have an outsourced CFO like me, somebody can help you work … We can do it, but you’ll be the one signing.

A lot of it is pretty self-explanatory, you should be able to do for yourself. The name, the title, the social security number, the date of birth, place of birth, ethnicity, and all of these questions they want to know. There are times where you’re going to work with lenders that are non-SBA lenders that you won’t need to provide as much, but, as I said earlier, with less disclosure potentially come higher rates. The more that the SBA one is really to ensure that you can repay so they can afford to lower your rate. That’s kind of how it works.

The SBA is not just going to take the form and take it on face value. They will check, double check, triple check everything. One thing you need to know about doing these types of forms, that they are government forms. You cannot, will not lie. Cannot stress that enough. It has to be truthful. Any false statement can be actually turned into a crime. You don’t want that. That’s why a lot of people really don’t trust themselves to fill out these forms. You outsource it to a third party who’s going to help keep you honest.

You go through the whole process. You don’t have to just be a US citizen to get this loan. You can be a lawful permanent resident and get it. That’s good to know. You have to go through all the questions. Some of them are easy, but then some are a little more complex. Some of them have multiple choices. Then they have questions that depend on questions that they asked you and the answers that you gave before. You got to go through it.

This is where you’re going to certify. There are certain certifications that need to happen, and you have to say true or false under penalty of perjury, which is, you don’t want to lie on a government form. This is very important. That’s that, and you will sign right there.

It bears to repeat. Certification of accuracy. “I certify that the information provided in this application and the information that I have provided in all supported documents,” not just on this form, “are true and accurate. I realize that the penalty for knowing making a false statement to obtain a guaranteed loan from the SBA, that I may be fined up $250,000 and maybe put in jail.” There’s the money and there’s the jail time.

Okay. Form 413. This is very unique to the SBA, but also if you’re dealing with a traditional bank, this personal financial statement. Which, our firm was spent quite a bit of time helping our customers really put together a personal financial statement. What is a personal financial statement? It’s basically your statement of net worth, where you take your assets coming from all places. You know the cash in your bank accounts, your savings accounts. AR that you have, yourself or the business. Your assets, and then your liabilities.

This is when you blend … Sometimes I talk to customers or potential clients that have multiple businesses with multiple filings. One may be an NLC, one may be an S score, one may be our sole prop. We have to … This is the one leading document in which you combine it all. At the end of it, what it produces is statement of net worth.

Hold on. I need to fix this more.

Okay. We’re back. Not sure what was happening with the PDF form. It wasn’t showing everything. Now you’re looking at the 413 form for the personal financial statement that is both used for the 7(a) and the 504 loan program, as you can see on top.

Assets equals liabilities plus equity. You see their net worth right here? This is what they’re going to want to look at. It has to make sense. This is where you come, that you know how well-informed you are about your business. Then, if the assets and liabilities is your personal balance sheet, the aggregate of all your assets and liabilities, your sources of income and your contingent liabilities is actually your profit and loss. This is when you go in deeper into any information about note payables to banks and other. This is where you have to really know what you owe, how much you owe. What was the original balance?

Sometimes I’ve talked to people, business owners, who don’t really know what’s going on with the business. That’s not really good if you don’t know what’s going on with your business. You should do your monthly bookkeeping. You should know exactly what’s going on with your business month over month, quarter over quarter, year over year, not just file your tax returns and forget about it. You need to understand … Basically, every number on your profit and loss you should know. Every moving piece of your business you should be aware of. Accounting is the language of business. You need to understand that language.

This is, with stocks and bonds, if you own them. Real estate owned. If you have your single-family residence where you live, where you’re listed there. Say if you have that and you have a rental property, or you have a vacation rental, all of it goes here. You don’t want to hide anything. You want to show everything. It goes without saying that you will need to … There’s that. There’s all of these forms.

One thing I forgot to show you that I’m going to show you right now, that there is the specific loan application checklist, which is such a really, really good tool for you. Aside from the application process that we went through, the SBA form 1919, and there is … You have your statement of personal history, which is 912, and your personal financial statement, 413.

Then you have to provide business financial statements. This is what you provide your interim financials from, your accounting software. Most people in the US use QuickBooks, some use Xero, and a combination. If you have a really large business, you’re probably going to to use NetSuite by Oracle, et cetera. You provide your profit and loss statement, your projected financials.

There is the profit and loss statement, which is your historical year-to-date financials, your profit and loss. But also you have to provide pro forma work, which is your projected financial statements. This is where a lot of people get really stuck, is, “How do I forecast what I’m going to do in the next 12 months?” There are tools, there are templates that you can use to create a rolling cash forecast or a rolling 12-month P&L.

Ownership and affiliations. Business certificates or licenses. If you need any type of a special license for your business, you need to have it, and you’re going to need to show copy of it. Your loan application history.

And, last but not least, your income tax returns, which, they need to jive with your interim financials. I see this quite often, that your books, say your QuickBooks online account and your QuickBooks desktop, if I pull the financials from that, they’re not going to match what you have in the tax returns, and that’s a big red flag. What we do is we want to make sure that everything coexists nicely. If your sales and your tax returns were a million dollars on a cash basis, your sales on a cash basis on your books would also be a million dollars. Everything coexists nicely and tells a nice story about you.

This is what we do. We help you put together a very nice story. You’re going to be telling a story about yourself so you can get a loan. You’re raising capital. This is no different than you going into the Shark Tank and raising capital. You have to tell a story that makes sense, that you’re a good risk.

Your business lease paperwork. If you have a multi-year lease, of course, all of that you want to show.

This is all I could go on, but there’s a whole lot to discover and there’s a whole lot to do. This is a very excellent tool, and hope this video was useful. Please comment below and let me know what you think about this video, and if there was useful, and if you can use this type of loan for your business.

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