SBA Loan Options for Manufacturing

If you are starting a small business in the manufacturing sector or growing your business, you're probably thinking about capital. Chances are you’ll need some type of financing. SBA manufacturing loans, designed by the Small Business Administration, benefit small businesses of all types.

Manufacturers often need access to capital to invest in new equipment. They have many of the same expenses as other businesses, like wages and employee benefits. However, they also could need help financing manufacturing costs or project costs. A loan for factory setups or a new manufacturing unit might be the key to profitability. When it comes to a small business loan for manufacturing, help from the federal government is available. SBA manufacturing loans can provide long-term financing options with affordable interest rates.

The Small Business Administration loan program has options — particularly the SBA 7(a) Loan and the SBA 504 Loan — that manufacturers might take advantage of. In this article, we'll dive into the SBA programs for manufacturing financing.

Two types of SBA loans for manufacturers

There are a number of reasons you might need a loan to finance manufacturing costs. These loans are designed to support businesses with longer payment cycles. The SBA offers two specific business loans that can be especially useful. These loans are federally backed but are not funded by the government. Lenders can be banks, credit unions, alternative lenders and online lenders.

SBA 7(a) loans

The SBA 7(a) program is responsible for most of the SBA’s loans. These loans can be a great source of capital for a variety of business owners. Some of the items they cover include:

  • Buying or expanding a business
  • Gathering working capital
  • Financing equipment, machinery, vehicles, or other essentials
  • Buying, refinancing, building, or renovating commercial property
  • Business acquisition or partner buy-outs
  • Debt refinancing

Lines of credit can be offered through the SBA 7(a) program’s CAPLines, Express, and Export lines.

SBA 7(a) loan benefits
SBA 7(a) loans for manufacturers offer longer maturity and easier business eligibility than conventional loans from traditional lenders. They allow a maximum amount of $5 million. The loans generally require lower down payments and also allow for longer repayment terms. The maximum maturities for SBA loans are: real estate, 25 years; equipment, up to 15 years or its useful life; and up to 10 years for working capital, inventory, or other uses, such as a business acquisition. Loan terms are based on the ability to repay, the purpose of the loan, and the useful life of the assets purchased.

SBA 504 loans

Also known as CDC/504 loans, these are obtained by working with a combination of a qualified lender, a Certified Development Company, and the SBA. The SBA loan requirements for manufacturers are a little different with the 504 loans, but they can be especially beneficial. This loan can be used to buy existing buildings or to construct a new one. It can help to buy land and make improvements, and to buy or upgrade equipment. And it can be used to modernize or convert existing facilities.

SBA 504 loan benefits
This loan offers long-term, fixed-rate financing for major assets, including land and buildings. A qualifying small manufacturing company can be approved for up to $5.5 million per project.

It can also improve cash flow for business borrowers who previously purchased their facility with a conventional loan. The SBA 504 Refinance Loan can provide lower monthly mortgage payments, with fixed 20- or 25-year interest rates. The refinance loans also allow you to take up to 20% of the appraised value of the property in cash. This can be used for eligible expenses, including:

  • Salaries (non-owners)
  • Rent and utilities
  • Inventory
  • Business lines of credit and credit card debts

These business loans are among the best available for manufacturers when it comes to affordability and funding. But the SBA has several requirements:

  • Your business must meet the SBA’s small business status requirements
  • You must be registered as a for-profit business and be operating legally
  • Your business should have fewer than 500 employees and less than $7.5 million revenue on average each year for the past three years. Or your net income must be under $5 million and your tangible net worth must be less than $15 million. You must show that you’re investing your own time and money into the business
  • Your business must be physically based in the U.S.
  • You’ll need to prove you’ve got a sound business purpose for the loan you’re requesting
  • You cannot be delinquent on any existing debts to the U.S. government

How to apply for an SBA loan

To apply, each person who owns more than 20% of your manufacturing business will need to fill out an application. Each person must also submit a personal financial statement outlining assets, debts, and income.

In addition, you will need to provide additional documentation regarding your business and personal finances, including:

  • An overview of your business history that explains the desired loan amount and loan term, and how you will use the loan and plans for repayment
  • Business financial statements showing profit and loss statements and projected financial statements
  • Three years of business tax returns, or all tax returns available if you haven’t been in business for three years
  • Three years of personal tax returns for all business principals
  • Records of any other loan applications
  • Copy of the business license or certificate of business
  • Copy of the business lease, if applicable
  • A list of the business’ affiliates and subsidiaries
  • Resumes of business principals

What you should consider before applying for an SBA loan

There’s a lot to consider when applying for a loan. You must decide which will work best for your needs. Here are some considerations:

  • How much you need. What will your overall costs be? It’s important to make sure that the amount of funding requested will be enough to cover your expenses. But it’s equally important to select an amount that you will be able to pay back without a problem 
  • Personal guarantee. Because a personal guarantee is often required to be awarded an SBA loan, you must consider whether you, as the guarantor, will be able to pay back the loan if your business is unable to
  • Fees. The fee amounts will vary, depending on which loan you pursue and the lender from whom you receive funding. But if they’re to be paid out of pocket, make sure those fees won’t make it difficult for your business going forward
  • Guarantee fee. This fee is determined by the loan amount, the SBA guarantee, and the length of the loan term
  • Origination fee. This will vary too, depending on the lender and the loan amount. It compensates the lender for processing the loan application
  • Packaging fees. Some loan providers will charge an SBA packaging fee to organize your loan documents. While it might not seem necessary, this process can help improve your approval chances, overall. The fee is generally between $2,000 and $5,000. If your application is not approved, some lenders will return the fee
  • Closing costs. These depend on your loan terms. To get an idea of what those costs might be, plan for a cost of about 4% of the total amount you plan to borrow

SBA manufacturing loan resources

SBA Loans can be a great resource to help keep a manufacturing business thriving. It’s important to understand which loan type best suits your project's costs and your business' needs. TD Bank is here to help you find the best fit to fund your manufacturing endeavors.

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