Business Franchise

Every loan is not more than a transaction between two parties. The first party is the lender (bank, financial institution, government authority and so on) another is the borrower (person, company, organization or institution). When people speak about obtaining a loan to start or expand a franchise business in most cases they consider the eligibility of their idea or business sphere to get a credit. But this is a two-way road. The franchisee needs to check the eligibility of the loan conditions to finance his/her idea. Today I’m going to write about the conditions of the Small Business Administration loans programs. I’ll tell you what they can provide you (what you have to provide them I described in my previous messages).

While thinking if the SBA programs are suitable for you the first thing to take into consideration is the maximum money you can obtain. The SBA’s 7(a) Loan Program limits the loan amount to a maximum of $2,000,000 dollars. But is doesn’t mean that you will get the Small Business Administration guaranty for the whole sum of loan. SBA’s maximum guaranty is $1,500,000. Thus, if a business managed to get the SBA guaranteed loan for $2,000,000 dollars, the maximum guaranty to the lender will be $1,500,000 or 75 percent.

The next thing is interest rate. It’s necessary to take it into consideration and to compare with other possible loans because interests will increase your company’s fixed costs.
As you can learn from my other articles dedicated to the SBA, this government institution doesn’t provide money itself but provides guaranties. It means that the interest rates are a subject to negotiations as regarding any other loan from commercial institution. But at the same time the Small Business Administration establishes maximums, which are pegged to the Prime Rate. This is one of their instruments of small business support.
In most case the interest rate is fixed (it’s easier to calculate I think) and it depends on the amount of loan and its maturity. Below you can see the table of possible fixed rates.

Loan amount Maturity Interest rate
$50,000 or more less than 7 years Prime Plus 2.25
$50,000 or more more than 7 years Prime Plus 2.75
$25,000 - $50.000 less than 7 years Prime Plus 3.25
$25,000 - $50.000 more than 7 years Prime Plus 3.75
$25,000 or less less than 7 years Prime Plus 4.25
$25,000 or less more than 7 years Prime Plus 4.75

Sometimes financial institutions use variable rate loans. The formula to calculate the interest rate is rather complicated. It uses the fixed rates presented above and rates the federal government pays for loans. It means that this rate is more adjusted to the economic changes like inflation, recourses’ prices, stock market situation and government monetary and fiscal policy. The rate can change not often than monthly and must be consistent (calculated on either monthly, quarterly, semiannually, annually or any other defined, consistent basis). So in the case of variable interest rate the lender and the borrower negotiate the amount of the spread that will be added to the base rate.
It’s also should be mentioned that SBA strictly prohibits the majority of the fees of SBA loan applicants.
And there’s one more thing that should be taken into consideration. It’s the prepayment penalty.
SBA loans that have the maturity 15 years or more and the prepayment amount is over 25 percent of the whole amount and the prepayment is made within the first three years are charged the penalty.
It could be calculated this way: 5% during the first year, 3% during the second year or 1% during the third year after disbursement.
This information is enough to estimate whether you are capable to receive the SBA loan and whether you need it.

This entry was posted on Friday, July 14th, 2006 at 9:59 am and is filed under General, Franchise Law. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.