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SBA Support for Expanding Mining Operations

Expansion of mining is expensive and challenging. In order to assist the mining firms in their expansion, the SBA provides different kinds of loans. This support can go miles in the development of new sites, equipment procurement, or perhaps enhancing the production capacity.

by | Jun 28, 2024 | USDA B&I, Mining

How the SBA Supports Expanding Mining Operations 

Understanding Loan-to-Value Ratio in ABL

Expansion of mining is expensive and challenging. In order to assist the mining firms in their expansion, the SBA provides different kinds of loans. This support can go miles in the development of new sites, equipment procurement, or perhaps enhancing the production capacity.

The Types of SBA Loans More Suitable for Mining and Drilling Enterprises

There are many small business administration loans that are appropriate for mining ventures. The most relevant ones are the ones called SBA 7(a) Loan, SBA 504 Loan, and SBA Microloan Program.

SBA 7(a) Loan 

SBA 7(a) Loan is the most popular and widely used loan program being offered by the SBA. It offers grants up to $5000 000 for the eligible costs, which may be expended in various manners. This loan offered to mining companies can be used for purchasing of equipment, acquiring land, or for any expenses in the course of operation. 

The terms are more liberal; that is repayment tenure for real estate can be over 25 years, while for equipment is up to 10 years. Interest rates are quite standard and average between 5% and 8%.

SBA 504 Loan

The SBA 504 Loan is major for capital assets, such as land and installations. It even provides up to $5. Each project is estimated at $5 million, although total project costs could rise to $20 million or more, including other sources of funding income. This particular type of loan is suitable for mining firms that have to purchase large equipment and other fixed assets. Interest rates are also constant, normally falling between 3% and 6%, while the periods offered are between 5 and 20 years.

SBA Microloan Program

The SBA Microloan Program offers smaller loans; maximum amount of which is $50 000. Although it appears to be confined, it is suitable for the small scale mining endeavors or for a specific purpose, for instance, to buy a small machine or meet short-term working expenses. The interest rates are a tad higher, often ranging between 8% and 13%, and the repayment periods are relatively short, up to 6 years.

Pros of SBA Loans for Mining Ventures

Benefits of Opting for ABL Loans

Many advantages can be highlighted when it comes to SBA loans for mining businesses. These benefits include; low interest on the SBA guaranteed loans, a long repayment period, and a large amount of finance provided.

Lower Interest Rates

SBA loans are particularly advantageous in that the interest rate here is significantly lower than that of conventional loans. For instance, a mining firm that requires $1 million to purchase equipment can access an SBA 7(a) loan at an interest rate of 6%. 

In the event that the loan was to be repaid over ten years, the monthly payment would be approximately $11,102, and the total repayment would be approximately $1.33 million. 

At the same time, a conventional loan at an interest rate of 8% means that the monthly installment would be nearly $12,134, and the total amount of repayment, nearly $1.46 million.

Longer Repayment Terms

SBA loans afford longer periods in which companies have to pay for the credit received and, hence, are easier to manage. For instance, an SBA 504 Loan where the borrower acquires $5 million for purchasing new mining equipment can be given for a term of 20 years. 

If the financier charges a fixed interest of 5%, then the monthly payment would be approximately $33,000. Hence, the long loan term helps to minimize monthly expenditures so that financial resources can be directed towards urgent aspects of the company.

Substantial Funding Amounts

An SBA loan offers a large amount financing, critical to large-scale mining ventures. Like most of the other SBA loans, the 7(a) and the 504 loans can both provide up to $5 million per project. This can be important for such things as expanding the operation, purchasing new machinery, or gaining more territory.

Thus SBA loans can be a game-changer for mining companies that are interested in expansion and modernization of their facilities.

Qualification Requirements

Various conditions govern SBA 504 loan program with regard to qualification. These requirements serve to make sure that SBA-backed loans are provided to prospective business ventures that are capable of being profitable and, therefore, capable of repaying the loans.

Credit Score

The business owner must have good credit standing. In general, credit scores starting from 680 are more favorable. This score is an index of the borrower’s credit standing and capacity to service the credit facility.

Business Plan

It is important to establish a sound business strategy. The perfection of this plan should incorporate how the company intends to employ the loan, the balance sheet expectation, and how the SBA loan will assist the business to advance. 

In the case of a mining operation it may encompass specific strategies on new areas to be developed, equipment to be purchased, and production to be enhanced.

Collateral 

Security is usually needed for SBA loans, particularly for greater sums of money. This could be fixed assets such as equipment or land, or inventory, which will form the basis of the assets side of the balance sheet. 

The collateral also works to the benefit of the lender as it lowers the risk of the loan and can affect the term and interest offered to customers.

Permitted Uses of SBA Loans in Mining

Factoring vs Tangible Assets

SBA loans have no set limitations for the types of purposes they must be applied for, and mining operations can use the funds in a broad range of ways. These use cases contribute to meaningful support of business development and to the efficiency of its operations.

Equipment Purchase

The most common application of SBA loans in mining is the acquisition of new equipment. This involves drills, trucks, and processing plants for ores and metals as fertilizers. For instance, a mining firm might utilize an SBA 504 Loan to acquire $3 million of equipment to increase production capability.

Real Estate Acquisition 

SBA loans can also be used by mining companies to purchase land. This could be for new mining sites or to expand the current ones to meet the increasing demand for mineral resources. One can use the SBA 7(a) Loan to acquire more land and, as such, expand the mining operations of the business.

Working Capital

Thus, SBA loans can help in financing working capital where business needs cash for their day to day operations. This encompasses paying employees’ wages, buying office stationery and other insignificant daily expenses emanating from the business operations. For example, a mining firm may fund short-term costs by applying for an SBA Microloan.

The Application Process

Understanding Account-Based Loans - ABL Loans

The process of applying for an SBA loan has various stages. By understanding this process, mining companies can better prepare and thus improve the odds of having their projects approved for funding.

Preparing Documentation

The first process includes collecting all the required paperwork. Some of the documents include; financial statements, tax returns, other formal business documents such as business plan, personal identification and other identification documents, and other financial statements. For instance, a mining company would be expected to offer balance sheet, its income statement, and statement of cash flows.

Submitting the Application

Then, the company forwards the loan application to an SBA-eligible lender. The applicant is required to provide all relevant documents and a description of how the funds from the loan will be spent.

Lender Review and SBA Approval

After the application has been submitted to the lender, he or she may ask for some more documents or explanations. Once the application is approved by the lender, it is taken to SBA for final approval. 

The SBA will in turn assess your application against the guidelines as mentioned below and if they meet the requirements you will be granted the loan; otherwise, you will be rejected.

Things to Know Before Applying for SBA Loans

Navigating the Due Diligence Process and Associated Costs

The following is a list of some viable and critical factors that mining companies should consider with regard to SBA loans: Some of these include the function of the SBA, the amount of money that one is willing to provide as security, and the return of working with professional lenders only.

The Role of the SBA 

The SBA does not actually provide cash to businesses, as most people understand what lending means. Rather, it also commits to lenders, offering letters of guarantees that enable the minimization of the lender’s risk. This makes it easier for businesses to get loans that are easily renewable and at very low interest.

Costs Involved 

SBA loans have their advantages, but there are also some disadvantages or costs that come with the package. These can include; application fees, closing costs and guarantee fees. For instance, the SBA can require a guarantee fee of three per cent if you are requesting a $1 million loan.

This comes to around  $30,000. All these expenses should be incorporated within the general portfolio of loans.

Advantages of Working With Approved Lenders 

It is always advisable to work with lenders who have prior knowledge in dealing with SBA loans. Many of these lenders are familiar with the workings of an SBA loan and can be of great help in such situations. 

According to financial expert Sarah Thompson, “You can increase your chances of being approved for SBA loans by selecting a lender with experience in processing these types of loans.

Conclusion

The SBA loan amount has a very important role in enhancing the expansion of mining operations. Through the affiliated loan programs, the SBA assists mining organizations in obtaining the requisite funds for expansion and improvement.

Flaney Capital can help streamline your application process to increase your chances of approval for SBA loans for mining.  We also connect borrowers to low-interest lenders in our network. Contact us to learn more. 

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Are you ready to take your business to new heights? Discover the power of the SBA Business Industry Program. With its comprehensive eligibility criteria, underwriting requirements, and loan guarantees, this program provides accessible and affordable loan options for businesses in rural areas.

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FAQ

Here are some answers to Frequently Asked Questions.

What are the main advantages of ABL loans?
ABL loans allow companies to use their existing assets as collateral for financing, providing greater flexibility than traditional lending methods.
Are there any risks associated with ABL loans?
Yes, if a business cannot repay its loan, the lender may seize the assets used as collateral. Businesses need to understand this risk before opting for an ABL loan.
How does accounts receivable factoring work for ABL loans?
In accounts receivable factoring within the context of ABL loans, a business sells its outstanding invoices (accounts receivable) at a discount to obtain immediate cash.
What is involved in the due diligence process for obtaining an ABL loan?
The due diligence process typically involves assessing a company’s financial health, including reviewing its balance sheet, income statement, and cash flow statement, among other things.
Can all types of companies apply for an ABL loan?
While any company can apply for an ABL loan, it is particularly beneficial for those with a high volume of accounts receivable or significant tangible assets.