The Small Business Administration has financial assistance programs that provide access to debt and equity primarily from banks or other private sources. Here, we cover those programs briefly.
The qualifications for these programs change from time to time. Be sure to check with SBA for the most recent criteria.
SBA's four basic loan programs are: Guaranteed Loans, Certified Development Company Loans or 504 Loan Program, Small Business Investment Companies, and Microloans.
SBA evaluates each loan application on two levels. The first is for eligibility which varies by industry and SBA program. The second evaluation is based on the credit merits of the application.
The SBA places its primary emphasis for loan consideration on the demonstrated ability of the business to repay all business-related debt, including the new loan obligation. Additionally, a reasonable "at stake" equity injection by the applicant is required.
Each application is individually considered based on earnings potential, collateral, track record and/or projections, management, and the type of businesses in the same field.
While SBA's standards are designed to be more relaxed than those of commercial lenders the SBA will not approve loans to businesses with unsatisfactory profit history, inadequate equity investment, unsupported projections, or, unacceptable credit histories.
Regular Guaranteed Loans include International Trade loans, Express Loans, Patriot Express Loans, Small and Rural Advantage Loans, and Community Express Loans.
This is SBA's most frequently used loan program. A guaranteed loan is one made by a commercial lending institution (usually a bank) to a small business customer. The SBA provides the bank with a guarantee that will pay the bank a portion of the unpaid balance on loans that are not paid in full by the customer.
Every bank has its own internal credit standard and policy for approval of its loans. The SBA's guarantee permits a bank to broaden its own criteria to accommodate additional lending because of the federally-backed assurances.
While the guaranty extends the range of credit available through commercial lenders, it will not cover unsubstantiated repayment, poor collateral or improperly documented requests.
Therefore, it is incumbent on the applicant to find out if the request has a chance and then work with the bank to submit all required documentation first, so that the bank may evaluate the proposal and make its decision.
Under this program, the bank analyzes the credit and makes one of three decisions: to approve it entirely by itself; to approve subject to an SBA guaranty; or to decline the loan. Should the second method be chosen, the bank will submit the application to SBA on behalf of both the borrower and itself.
Keep in mind that the applicant is the bank's customer and the bank is SBA's customer. The prospective borrower does not need to contact the SBA.
General Information
Under the guaranty program, the lender provides all of the money. The SBA can guarantee loans up to $2 million; the guarantee is 75% of a loan over $150,000 and 85% of a loan up to $150,000. A small business may have more than one SBA loan, but the SBA's share cannot exceed $2 million.
The SBA will charge a fee for guaranteeing the loan; fees will run from 2% on loans up to $150,000 to 3.5% on those over $750,000, but if the loan has a term of less than a year the fee may be as low as .25%. SBA does not provide grants to start or grow a business.
Terms of Loan
The bank and its client (small business) negotiate the terms within the parameters described in the following paragraphs.
Interest Rate
There are two rate structures available on SBA guaranteed loans: fixed and variable. Variable rate loans can be adjusted monthly, quarterly, semi-annually, annually, and float with the prime rate. Fixed-rate loans do not change during the life of the loan.
The maximum allowable rate for both types of loans is 2.75% over prime for loans of seven years and longer, and 2.25% over the prime rate for loans up to seven years. This prime rate is the minimum New York prime rate as published in The Wall Street Journal. Loans under $50,000 may have a higher rate.
Maturity
The length of a loan is determined by the use of the loan proceeds. Working capital loans are generally limited to seven years. Machinery and equipment loans are based on the life of the machinery and equipment, but not to exceed 10 years. Real estate loans have maximum maturity of 25 years. These are the maximum terms. The bank may request shorter terms.
Use of Proceeds
A business may borrow for anything on the balance sheet such as inventory, receivables, land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, accounts payable. Funds may be used to purchase a business. Generally funds may not be used to effect a change of ownership among family members. If part of the funds are to be used to pay debts owing to the participating bank, additional collateral may be required from the bank.
Collateral
Collateral are those assets which secure a loan in the event of a default. Collateral can consist of the following: land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, inventory, accounts receivable, mortgages on fixed assets held personally, or an assignment of the interest in a contract for deed. SBA can take a second position, if necessary. The collateral offered should be reasonably adequate to secure the loan.
Equity
An applicant must have an adequate capital investment in its own business. Typically, a new applicant should inject 33% of the total funds needed to start a new business. For existing businesses, SBA uses the business ratios provided by Dun and Bradstreet and Robert Morris Associates. The SBA considers all credit factors before making a decision.
Repayment
SBA and the bank expect a loan to be paid out of the profits of the business. The bottom line of any credit decision is whether a business can repay the loan and other obligations from earnings. This is determined by analyzing all the facts presented in an application; primarily, management ability, equity invested, financial statements of owners, and detailed justification of projected earnings.
Small/Rural Lender Advantage
The Small/Rural Lender Advantage Initiative is part of SBA's 7(a) loan program and encourages smaller and or rural lenders to offer SBA loans by streamlining the agency's loan application and approval process.
The key features include:
the maximum loan size of $350,000;
an SBA guarantee of 85% is available for loans of $150,000 or less; 75% if the loan is larger; and
the loan has a short, simplified application, a quick processing time, and fillable PDF application.
Only limited, key financial documents are required.
International Trade Loans
This program operates under the Guaranteed Loan Program and utilizes the same credit criteria and conditions. SBA may guarantee 90% to a maximum of $2 million for fixed asset acquisition and 85% to a maximum of $250,000 for working capital. No consolidation of existing debt or refinancing is allowed.
The applicant must establish that the loan proceeds significantly expand existing exports, develop new export markets or must show substantial adverse impact by imports.
SBAExpress
This program allows lenders to make credit decisions directly, without SBA input. Lenders also use all their own documents including the note, security agreement and mortgage. SBA Express provides a fast turnaround on credit decisions. SBA Express loans also contain a revolving feature with a seven-year term. SBA guaranties 50% of the loan, rather than the 75 to 85% under the normal 7(a) program.
SBAExpress interest rates can be higher than those allowed under the basic 7(a) program. Interest rates are determined by the market, but with this program the lender is allowed to charge a rate higher than the 2.25% and 2.75% over prime that is normally allowed. The loan limit under this program is $350,000. Lenders need to be approved by SBA for participation in the program. All other eligibility criteria remain the same.
SBA Community Express Loans provide a greater guaranty percentage if the lender agrees to provide technical assistance to the borrower for the term of the loan. SBA Export Express loans also allow a greater guaranty to the lender if the borrower is involved in exporting products or services.
SBA Express loans may be used as a revolver with a limit of seven years.
Patriot Express Loans
The Patriot Ex[press Loan Imitative is a new loan program for veterans and member of the military community wanting to establish or expand a small business.
The program is open to veterans, service-disabled veterans, active duty service members, participating in the Military Transition Assistance Program, Reservists, and National Guard Members, current spouses of any of the above, and the widowed spouse of a service member or veteran who died during service or of a service-connected disability.
Loans are available up to $500,000 and qualify for SBA's maximum guarantee of 85% for loans of $150,000 or less and 75% for loans over $150,000 and up to $500,000.
For loans above $350,000, lenders are required to take all available collateral.
Patriot Express loans can be used for most business purposes, including startup, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.
The loans generally offer 2.25 to 4.75% over prime, depending upon the size and maturity of the loan.
The program is slated to operate through December 31, 2010.
Short-term Guaranteed Loans include the Contract Loan Program, Seasonal Line of Credit, Export Working Capital Program, and Asset-based loan.
Contract Loan Program
The purpose of this program is to provide working capital needed to handle short-term contracts. A business must have been in operation for 12 months preceding the date of application.
Any small business which constructs, manufactures, or provides a service under an assignable contract is eligible. An application must be filed for each contract. More than one contract may be outstanding at any one time. All disbursements must be supported by invoices and/or time sheets. Maturity is generally not more than 12 months.
Applicant's ability to cost the work, bid, and perform is a prime requisite. Cash flow projections are mandatory. SBA requires an acknowledged assignment of the contract proceeds as collateral, however, the lender is expected to take such additional collateral as prudent lending practices dictate.
Proceeds or an agreed-upon percentage must be applied to the loan balance. The percentage must be set forth in the loan authorization and note. If bonding is necessary and the surety requires an assignment of the contract, SBA will consider only other collateral that is worthwhile. The guarantee fee is one quarter of 1% of the guaranteed portion of the loan.
Seasonal Line of Credit
The Seasonal Line of Credit program is used to finance working capital needs arising from the seasonal upswing of a business.
Typical uses are to build up inventory and to pay for increased labor costs. Loans are repaid from the cash flow of the business. This program may have a limited revolving feature and is only available under the bank guarantee program.
To be eligible, a small business must have been in operation for the previous 12 months and have a definite pattern of seasonal activity. Only one seasonal line of credit may be outstanding at one time and followed by an "out of debt to the SBA" period of at least 30 days.
The applicant must be current on payroll taxes and have in operation a depository plan for payroll taxes. A cash flow projection showing the business' ability to provide for its needs is required. Maturity may not exceed 12 months.
As a minimum, collateral will consist of inventory and accounts receivable. The guaranty fee is one quarter of 1%. These loans may not be sold on the secondary market.
Export Working Capital Program
Under this program, the SBA guarantees short-term working capital loans made by participating lenders to exporters.
Proceeds of loans guaranteed under this program may not be used to purchase fixed assets, but can be used to finance the acquisition and production of goods and services being exported, or the accounts receivable of export sales.
Proceeds guaranteed under this program can be used for single or multiple export sales, and the underlying loan can be a revolving one. The maximum maturity is one year.
Eligibility requirements with respect to the size of the borrower, the amount of the guarantee and the loan are the same as for the SBA's regular guaranty program. The borrower must have been in business for at least 12 continuous months before filing an application.
Asset-Based
This program provides a guarantee of a short-term revolving line of credit, based upon the value of the borrower's accounts receivable and inventory.
The maximum term of an Asset-Based loan is five years, and the balance of the line of credit can revolve, in that it can be drawn upon and repaid as the borrower's cash cycle dictates, so long as the outstanding balance does not exceed the approved amount of the Asset-Based account.
Under this program, the SBA can guarantee up to $1 million of the line of credit, and the SBA's guarantee cannot exceed 75% of the total line of credit. Generally, any business eligible under the SBA's regular guaranty program will be eligible.
The SBA uses the same interest rate structures as under its regular guaranty program. Unlike the regular guaranty program, under the Asset-Based program no lender's fee restrictions apply, although the lender must disclose all fees charged in connection with the loan through its final payout. Personal guarantees are required of each person who owns 20% or more of the borrowing business.
Participating lending banks must have reached a 750 agreement with the SBA and completed a lender's registration (different from the Low-Doc registration) with the SBA. The lender must conduct field examinations of borrowers, both initially and at least semi-annually during the term of the line of credit, including an analysis of accounts receivable, inventory, accounts payable, and financial statements and accounts. The lender, however, can hire a third-party server.
In the event of default, the SBA will pay on the guaranty after the pledged assets have been liquidated, but the SBA will pay only the interest that has accrued more than 120 days after the date of default.
Also known as the 504 Loan Program, the Certified Development Company loan program makes joint federal and private-sector financing available to small businesses.
The purpose of the program is to stimulate growth and expansion of small businesses within cities, regions and states having an SBA-approved Certified Development Company, thereby creating more jobs, increasing the local tax base, and expanding business ownership opportunities.
This program provides long-term fixed-asset financing for small businesses. This type of loan is made by a Certified Development Company (CDC) in conjunction with a second loan from a commercial lender in order to meet a majority of the total financing requirements of a specific project.
An eligible project's purpose is to assist small businesses with financing plant acquisition, construction, conversion or expansion including acquisition of land, existing buildings and leasehold improvements for an identifiable small business, and machinery and equipment with a minimum 10-year economic life.
Loan proceeds cannot be used for working capital or debt repayment. Financing for the 504 program is provided jointly by the federal government and the private sector.
The CDC loan amount will vary between 30 and 40% of the total project, not to exceed $1.5 million on most loans, but under specific circumstances for small manufacturers, rural areas, and to meet certain public policy goals, it may go as high as $4 million, with the balance coming from non-governmental sources.
Usually, 50% is lent directly by a bank and 10 to 20% originates from the applicants themselves. The CDC obtains its funds from the sale of a debenture, which is fully guaranteed by the SBA, and then again lends these funds to the borrower.
Maturities of debentures are for 10- and 20-year periods. The useful life of the asset determines the term of the debenture. The interest rate is set at the time of the sale of the debenture. The benefits of this program are a favorable interest rate mix and a longer pay back period.
This program has certain unique requirements such as a measure of economic impact through the job generation potential of each project, so it is recommended that any interested party discuss the application directly with the 504 company serving its area.
The SBA licenses, regulates and provides financial assistance to privately owned and operated Small Business Investment Companies (SBICs) whose major function is to make venture investments by supplying equity capital and extending unsecured loans and loans not fully collateralized to small enterprises which meet their investment criteria.
SBICs are privately capitalized and obtain financial leverage from the SBA. The administration of the SBIC program is handled by the SBA Central Office in Washington, D.C.
The purpose of the SBA's Microloan program is to assist women, low-income individuals, minority entrepreneurs and business owners, and other individuals possessing the capability to operate successful business concerns and to assist small business concerns in those areas defined by the SBA as economically distressed areas.
The SBA is authorized under this program to make direct loans to eligible and qualified intermediary lenders who will use those loan proceeds to make short-term, fixed-interest rate loans to startup, newly established and growing small business concerns.
The loans can range in amount from a few hundred dollars to as much as $35,000. Further, the SBA may make grants to the eligible and qualified intermediary lenders to be used to provide intensive marketing, management, and technical assistance to their borrowers.
In Minnesota, several intermediaries have been approved. They are:
