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SBA Loans for Specialty Trade Contractors
Specialty trade contractors are often asked to complete specific pieces of a project. They finish the plumbing, the electrical work, the heating and air conditioning, or site preparation. These trade contractors typically work under a general contractor or operative builders. They tend to work on a fixed timeline and they primarily work on the site.
Some work requests might call for a little more cash flow than a contractor might have access to. Sometimes, the request calls for a larger crew or for specific equipment to complete the job. Failing to meet the requirements of the contract or the timeline could bring financial penalties, too. A small business owner might need financial assistance, like a small business administration (SBA) loan. These loans might be an essential resource to getting the job done on time. It's important to consider various financing options for trade contractors.
The SBA’s two loan programs — the SBA 7(a) Loan and the SBA 504 Loan — offer great funding opportunities. They're good for specialty trade contractors and for general contractor loans. Find out which one might be a good fit to help you expand, grow, or fund your small business.
Two types of SBA loans for specialty trade contractors
There are a number of reasons why business owners might need a small business loan. Maybe they need access to working capital, equipment financing, or debt consolidation. The SBA offers two specific loans that can be especially useful to specialty trade contractors. These loans can help them buy equipment to complete their projects and to grow their businesses.
SBA 7(a) loans
The SBA 7(a) loan† is the most common of the SBA’s offerings. It’s generally the best option for real estate as part of a business purchase. Some businesses, though, use it for both short- and long-term working capital, or for refinancing business debt. It can also be used for what specialty contractors most often need: to buy costly supplies and equipment. Lines of credit can also be offered through the SBA 7(a) program’s CAPLines, Express and Export lines.
SBA 7(a) loan benefits
This federal government-guaranteed loan offers fixed or variable interest rates and can be used for a variety of purposes. It is a convenient option for businesses that have good credit and finances, but that don’t meet bank eligibility requirements. This loan amount caps out at $5 million. Eligibility factors are specific to the type of business an applicant does, where they operate, and their credit history. These business loans are available either as term loans or as lines of credit. Longer repayment terms are also available. Terms for working capital can be 10 years. Terms for equipment cannot exceed the economic life of those assets. Terms for real estate can be 25 years.
SBA 504 loan
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. These loans offer more affordable options for large equipment and machinery or for real-estate related purchases. They can be used for fixed assets that can be used to promote business growth and job creation.
SBA 504 loan benefits
The loans require lower down payments than conventional loans. Businesses can secure up to 90% of the financing needed with these loans, more than most other loan options. Repayment periods are offered in longer terms, from 10, 20 and 25 years. Fees cap out at 2.65% and are included in the loan amount. That amount can be up to $5 million, or $5.5 million for certain energy projects and types of small manufacturer.
What you need to apply for an SBA loan
These SBA loans can be a good fit for specialty trade contractors.
First, ensure that you meet the SBA loan requirements for trade contractors, which typically include:
- Your business activities meet the SBA’s definition of a small business:
- Organized for profit
- Has a place of business in the U.S.
- Operates primarily within the U.S or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor
- Is independently owned and operated
- Is not dominant in its field on a national basis
- You have personal or business collateral to secure a percentage of the loan
- For a CDC/504 loan, the funding must be for a purchase that will either create or retain jobs or promote public policy goals (like assisting in manufacturing firms)
- You have not gotten funds from another lender. The SBA is designed to support “applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources”
Once you determine if you qualify for an SBA loan, you should consider which of the two loan options best suit your business financial needs.
Each has its own application process and is offered by different lenders. Once you have selected the loan type that will work best, find an SBA lender. Each lender’s requirements will vary, so be sure to research which lender best suits your needs.
Each person who owns more than 20% of the business will need to fill out the SBA loan application. They'll submit a personal financial statement, outlining assets, debts and income.
In addition, you will need records of your business and personal finances, including:
- An overview of your business history that explains the desired loan amount and loan term, details on 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 to show annual revenue for all business principals
- Records of any government loans you may have received
- 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 to consider before applying for an SBA loan
There’s a lot to consider. Here are some things to think about when it comes to getting a small business loan:
- 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 ensure your ability to buy that construction equipment or to build your staff. It’s equally important to select an amount that you will be able to pay back without a problem
- Personal guarantee. A personal guarantee is required to be considered for an SBA loan. You must consider whether you, as the guarantor, will be able to pay back the loan if your specialty trade contacting business is unable to
- Fees. The fee amounts will vary depending on which loan you pursue and which lender you use. 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, too, will vary, depending on the lender and the loan amount. It's compensation to the lender for processing the loan application
- Packaging fee. Some loan providers will charge an SBA packaging fee to organize your loan documents. While it might not seem necessary at first, this process can help improve your approval chances, overall. The fee is generally between $2,000 and $5,000
- Closing costs. As with other loans, there will be closing costs associated that may vary greatly, depending 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 that you plan to borrow
Resources for specialty trade contractors
Navigating the SBA loan process can be tricky. If you're a specialty trade contractor looking to learn more about SBA loan options to finance your equipment or machinery, see how TD Bank can help move your business forward.