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Understanding SBA Loans - 504, 7a, and EIDL

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SBA Loans Overview

Collin Gabriel November 2, 2021

Michelle Ramey (00:00):

Hi everybody. I’m Michelle Ramey statewide resource navigator with Oregon Native American Chamber or ONAC. And today we have Noah Brockman with us. He is the lead for the Capital Access Team at the SBDC in Portland. Hi Noah!

Noah Brockman (00:15):


Michelle Ramey (00:16):

Thank you for coming. So, um, I’m just going to jump right in today. I’ve had some clients over this past week, you know, the conversations around the COVID EIDL, um, you know, coming out and extending and revamping that program, extending the amounts that people can get, you know, they have until the end of December now, things have changed. Um, but I have had a few people that are pretty informed, but they’ve asked me some questions that I need some help with. And should they go for the COVID EIDL? Should they go for the 5 0 4? Should they do the seven, eight? Um, I know quite a bit about the COVID EIDL that I would like you to jump in and kind of help steer me on this and help help me decide the differences between them.

Noah Brockman (00:59):

Yeah, there, we can try and do that. I mean, there’s, there’s a lot of information available about all three of those programs, but, um, so let’s maybe try and narrow it down. So, you know, the first question I would ask would be if their business has experienced, you know, losses or challenges due to the pandemic and are, you know, you know, seeking, uh, funding to help cover operating costs. So if, if they were to say, yes, yes, our business has experienced challenges do due to the pandemic. And yes, we’re having a hard time cover operating costs and yes, we’re, we’re seeking, you know, grants and loans to help fill the, the void. Um, then, you know, great, you know, I would check out some grants first if, if there’s something, uh, in their local area that applies to their industry sector, um, if they’ve already gotten those or, um, there aren’t any available and it’s, you know, a very pressing need, then the Eid alone would definitely be something to look at.

Noah Brockman (02:12):

Um, they did make the change, um, to the program that allows folks to apply for up to $2 million now to cover, uh, operating expenses. And that’s based on, um, the business revenue and cost of goods sold. So they’re going to apply based on their actual, uh, 20 19, 20, 20, 20, 21 revenue and cost of goods sold. And essentially, um, SBA will qualify them for an eligible loan amount, but up to 2 million. And the interest rate is, is it’s a quite low, I think it’s 3.75, and it’s a fixed rate over 30 year loan. So obviously that’s, that’s going to be a pretty good situation. It could be prepaid paid off early, but it can only be used for, to cover operating costs. It’s not an expansion model. It’s not a startup loan, it’s it’s for an existing business suffering through the pandemic to help cover rent and utilities and,

Michelle Ramey (03:21):

And they needed to be in business prior to March of 2020, correct. For the COVID idle.

Noah Brockman (03:30):

Um, so if they, you know, if back to the initial conversation, if they were to say, well, it’s not necessarily pandemic related, it’s just kind of, you know, Hey, we’re a startup or we’re, we’re expanding and it’s not really due to COVID, it’s just, our business has, has a need for access to capital now. And it’s, um, you know, then we, we, we have to ask for what and how much, and if they said, well, um, anything other than real estate, then, you know, maybe an SBA seven, a guaranteed loan might be a good option. The seven loan is kind of the Swiss army. The 70 loan guarantee program is kind of like the Swiss army knife for small, small, uh, small businesses applying for capital. It can be used for pretty much most uses. It can be used for working capital can be used to buy new assets. It can be used to, um, actually even for real estate. Um, but there, there is also the SBA 5 0 4 guaranteed loan, which is specifically designed for commercial real estate and, um, like, you know, major equipment assets for manufacturing, that kind of thing. So the seven eight is this Swiss army knife, all purpose kind of loan guarantee program. Whereas the 5 0 4 is very specific.

Michelle Ramey (05:06):

Okay. We have some, uh, Fisher fishermen looking at adding a new boat. Uh, they’ve they’ve been facing some difficulties due to COVID. Um, you know, and with that comes a close fishing seasons, low, low costs that is being paid for the fish that they’ve caught. And they’re thinking that if they added another boat, they would increase their, their sales. Would that fall under COVID, it’s kind of a, that’s a difficult one because they have a few things that they’re wanting to accomplish. And

Noah Brockman (05:43):

Yeah, I know, I, I would say not a COVID SBA Eid eligible, um, funding option. I would say that’s more of a, you know, more of a traditional either a seven, eight loan, if that’s what the bank it does. It does come back to who the lender is. So if the lender is so most fishing operations are in rural areas because as designated by the us department of agriculture, uh, due to the population population being 40,000 or less. So if they’re in a rural area, there may be a USDA loan guarantee that a local bank could use to make that loan. Um, it could be, uh, an SBA seven, a loan guarantee that the banker would use to make that loan. Um, and again, back to the comment about the SBA 5 0 4 guarantees, it is that is a major asset it’s, it’s not commercial real estate, but it is a big asset purchase.

Noah Brockman (06:49):

So, you know, if that lender wanted to look at 5 0 4, you know, maybe that that might work, we’d have, you know, personally I would have to like dig through the regulations to see if New York for fishing vessels. Um, but the point is lenders have access to lots of different programs. And, um, so they’re gonna, they’re gonna look to whichever program is really the best fit for that particular deal based on where they’re at and what their bank utilizes as, um, as programs that the bank works with. So not every bank has like a lot of credit unions, for example, many of them over the years, haven’t done SBA loan guarantees, whereas some larger ones have the staff and the training and the familiarity with those programs to, to offer that. And, and really that the SBA loan is really just a loan guarantee to the, that helps the bank make that deal.

Noah Brockman (07:58):

So if the, if the deal doesn’t, if for some reason the business, um, doesn’t succeed and goes out of business, you know, let’s say five years after the loan was made and they can’t repay the bank, the bank can go back to the SBA who made the loan guarantee. It’s like, it’s like insurance for the loan and say, Hey, this business didn’t repay the loan. You know, we all did the best we could. It was guaranteed at 85%. And so then SBA pays the bank, 85% of the loan, um, and then comes after the business to try and recuperate the rest. So, um, that happens, but I just want to kind of clarify what the loan guarantee is. So that’s a lot of information

Michelle Ramey (08:46):

That is a lot of information, but it’s good information it’s useful because a lot of, a lot of businesses aren’t aware of that,

Noah Brockman (08:54):

You know, the easiest thing or the easiest place to start really is like, you know, let’s have a conversation about what it is, what the project is. The business owner is trying to fund. And maybe even who they’ve already talked to, cause if they, you know, likely the case, they already have a bank in mind, their bank. And hopefully they’ve talked to their banker, maybe just to get some ideas about what options their bank might have access to. And it’s okay if their bank doesn’t have good options, like if they were banking at a credit union and the credit union, we can’t do that. You know, there are other banks that can, but still, it’s great to have the conversation and kind of evaluate for that project or that deal, what options there are. That might be good bit.

Michelle Ramey (09:41):

And if there are bank, there are, there is a list, correct. On the SBA website that lists the banks that they do work with for these direct loans.

Noah Brockman (09:51):

Um, yeah, there are lists of, of banks that do offer SBA guaranteed loans, but I think it’s also, um, worthwhile to mention that an SBA guaranteed loan, isn’t the, the least expensive loan, a conventional loan from a bank that’s not SBA guaranteed is probably going to be cheaper than an SBA, guaranteed loan.

Noah Brockman (10:22):

So, you know, a lot of people who are small business owners are thinking, well, I’m a small business owner. I should probably be looking at SPEA. You know, NSPA loan. It’s like, well, probably, but if you can, if you can qualify, if you’re eligible to get a, you know, a regular commercial bank loan that doesn’t involve SBA and, and add on additional fees and higher interest rates, then, you know, you might want to pursue then great. And the bank’s going to be the one to identify that straight away. They’re going to say, you know, this is an easier deal to get done through conventional financing. We don’t need to make, we don’t need to bring in SBA on this. And, and the borrower’s going to have probably a less expensive, um, interest rate than they would have, you know, if the bank had required it to be an SBA loan. So that’s why I say it’s always good to have a conversation first, right. Folks sometimes, you know, have an understanding about something and it may or may not be correct in terms of the best fit.

Michelle Ramey (11:38):

Okay. Well that gives us some clarity on that. COVID idle. I really appreciate that because there you’re, you’re seeing a lot of media coverage around the COVID idle right now, and people are starting to ask a lot of questions. So I appreciate all that insight. Thank

Noah Brockman (11:55):

Yeah. If a business is really struggling through the pandemic, like so many are right. Um, it could be a really good option if they’ve exhausted all grant funding options already. Yeah. Yeah. It is.