The SBA 7(a) offers a maximum loan amount of $5 million and is one of the most popular loans offered by the United States Small Business Administration (SBA). The US liquor retail businesses are one of the major beneficiaries of these loans, having borrowed nearly $2.5 billion in the decade between 2006 and 2015. The average loan taken by the liquor retail stores during this period worked out to around $370,000. SBA loans are not very easily available and the qualification criteria is quite stringent going by direct lending norms that mainly relate to small businesses. Considering the amount of SBA loans that liquor retailers received, it’s ironic that traditional banks consider liquor retailers a high risk category.
SBA wants to know how you will use the loan
While it is true that SBA loans including those coming under 7(a) are available at highly economical rates of interest, the qualification criteria are quite stringent. That is because this US business funding, despite being an unsecured loan, is available at very low interest rates.
To be eligible for an SBA 7(a) loan, your organization should first meet SBA’s definition of a small business. Your area of operation must be within the administrative jurisdiction of the United States and you need to show adequate equity investment in your business. Most importantly, you need to utilize the loan for a viable and sound business objective.
SBA is familiar with the liquor retail businesses
Considering the billions of dollars worth of direct lender funding that the SBA has provided to the liquor retail businesses, it’s easy to see why there are some strict guidelines for the liquor retailers to follow. It is not lost on the SBA that traditional lenders consider liquor retail to be a high risk business.
However, the SBA has not allowed such questionable opinions of traditional lenders to influence its decision to fund liquor retailers. Inventory is the lifeblood of any retail business and it is no different for liquor retailers. Replenishing stock or buying in-demand stock, expanding operations or buying out partners that want out or even refinancing an existing debt which is very expensive are acceptable uses of an SBA 7(a) loan.
The loan is not for meeting regulatory costs
One of the main challenges of the liquor retail businesses is licensing and when considered on a national basis it is indeed a stiff barrier for most small businesses. For instance, the liquor license costs vary wildly from one state to another wherein it can cost just a few thousand dollars in one state and could run into hundreds of thousands in another.
The small business funding that the SBA provides under its 7(a) program does not allow borrowers to spend their loans on meeting the licensing costs. You can argue that it is related to the growth and expansion of your business but that is not how the SBA looks at it. It is better that you accept this licensing expenditure as part of your equity investment.