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Current SBA Loan Identification Programs
The SBA offers numerous loan programs to assist small businesses. It is
important to note, however, that the SBA is primarily a guarantor of loans
made by private and other institutions.
PROGRAM: Basic 7(a) Loan Guaranty
FUNCTION: Serves as the SBA’s primary business loan program to
help qualified small businesses obtain financing when they might not be
eligible for business loans through normal lending channels. It is also
the agency’s most flexible business loan program, since financing under
this program can be guaranteed for a variety of general business
purposes.
Loan proceeds can be used for most sound business purposes including
working capital, machinery and equipment, furniture and fixtures, land and
building (including purchase, renovation and new construction), leasehold
improvements, and debt refinancing (under special conditions). Loan
maturity is up to 10 years for working capital and generally up to 25
years for fixed assets.
CUSTOMER: Start-up and existing small businesses, commercial lending
institutions
DELIVERED THROUGH: Commercial lending institutions 7(a) loans are the
most basic and most used type loan of SBA's business loan programs. Its
name comes from section 7(a) of the Small Business Act, which authorizes
the Agency to provide business loans to American small businesses.
All 7(a) loans are provided by lenders who are called participants because
they participate with SBA in the 7(a) program. Not all lenders choose to
participate, but most American banks do. There are also some non-bank
lenders who participate with SBA in the 7(a) program which expands the
availability of lenders making loans under SBA guidelines.
7(a) loans are only available on a guaranty basis. This means they are
provided by lenders who choose to structure their own loans by SBA's
requirements and who apply and receive a guaranty from SBA on a portion of
this loan. The SBA does not fully guaranty 7(a) loans. The lender and SBA
share the risk that a borrower will not be able to repay the loan in full.
The guaranty is a guaranty against payment default. It does not cover
imprudent decisions by the lender or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders make and administer the
loans.
The business applies to a lender for their financing. The
lender decides if they will make the loan internally or if the application
has some weaknesses which, in their opinion, will require an SBA guaranty
if the loan is to be made. The guaranty which SBA provides is only
available to the lender. It assures the lender that in the event the
borrower does not repay their obligation and a payment default occurs, the
Government will reimburse the lender for its loss, up to the percentage of
SBA's guaranty. Under this program, the borrower remains obligated for the
full amount due.
All 7(a) loans which SBA guaranty must meet 7(a) criteria. The business
gets a loan from its lender with a 7(a) structure and the lender gets an
SBA guaranty on a portion or percentage of this loan. Hence the primary
business loan assistance program available to small business from the SBA
is called the 7(a) guaranty loan program.
A key concept of the 7(a) guaranty loan program is that the loan actually
comes from a commercial lender, not the Government. If the lender is not
willing to provide the loan, even if they may be able to get an SBA
guaranty, the Agency can not force the lender to change their mind.
Neither can SBA make the loan by itself because the Agency does not have
any money to lend. Therefore it is paramount that all applicants
positively approach the lender for a loan, and that they know the lenders
criteria and requirements as well as those of the SBA. In order to obtain
positive consideration for an SBA supported loan, the applicant must be
both eligible and creditworthy.
What SBA Seeks In A Loan Application:
In order to get a 7(a) loan, the applicant must first be eligible.
Repayment ability from the cash flow of the business is a primary
consideration in the SBA loan decision process but good character,
management capability, collateral, and owner's equity contribution are
also important considerations. All owners of 20 percent or more are
required to personally guarantee SBA loans.
Eligibility Criteria:
All applicants must be eligible to be considered for a 7(a) loan. The
eligibility requirements are designed to be as broad as possible in order
that this lending program can accommodate the most diverse variety of
small business financing needs. All businesses that are considered for
financing under SBA’s 7(a) loan program must: meet SBA size standards, be
for-profit, not already have the internal resources (business or personal)
to provide the financing, and be able to demonstrate repayment. Certain
variations of SBA’s 7(a) loan program may also require additional
eligibility criteria. Special purpose programs will identify those
additional criteria.
Eligibility factors for all 7(a) loans include: size, type of business,
use of proceeds, and the availability of funds from other sources. The
following links will provide more detailed information on these
eligibility issues.
Character Considerations:
SBA must determine if the principals of each applicant firm have
historically shown the willingness and ability to pay their debts and
whether they abided by the laws of their community. The Agency must know
if there are any factors which impact on these issues. Therefore, a
"Statement of Personal History" is obtained from each principal.
Other Aspects Of The Basic 7(a) Loan Program
In addition to credit and eligibility criteria, an applicant should be
aware of the general types of terms and conditions they can expect if SBA
is involved in the financial assistance. The specific terms of SBA loans
are negotiated between an applicant and the participating financial
institution, subject to the requirements of SBA. In general, the following
provisions apply to all SBA 7(a) loans. However, certain Loan Programs or
Lender Programs vary from these standards. These variations are indicated
for each program.
SBA offers multiple variations of the basic 7(a) loan program to
accommodate targeted needs.
PROGRAM: Certified Development Company (CDC), a 504 Loan Program
FUNCTION: Provides long-term, fixed-rate financing to small
businesses to acquire real estate or machinery or equipment for expansion
or modernization. Typically a 504 project includes a loan secured from a
private-sector lender with a senior lien, a loan secured from a CDC
(funded by a 100 percent SBA-guaranteed debenture) with a junior lien
covering up to 40 percent of the total cost, and a contribution of at
least 10 percent equity from the borrower.
CUSTOMER: Small businesses requiring “brick and mortar” financing
DELIVERED THROUGH: Certified development companies (private, non-profit
corporations set up to contribute to the economic development of their
communities or regions)
The CDC/504 loan program is a long-term financing tool for economic
development within a community. The 504 Program provides growing
businesses with long-term, fixed-rate financing for major fixed assets,
such as land and buildings. A Certified Development Company is a nonprofit
corporation set up to contribute to the economic development of its
community. CDCs work with the SBA and private-sector lenders to provide
financing to small businesses. There are about 270 CDCs nationwide, with
each covering a specific geographic area.
Typically, a 504 project includes a loan secured with a senior lien from a
private-sector lender covering up to 50 percent of the project cost, a
loan secured with a junior lien from the CDC (backed by a 100 percent
SBA-guaranteed debenture) covering up to 40 percent of the cost, and a
contribution of at least 10 percent equity from the small business being
helped.
Maximum Debenture
The maximum SBA debenture is $1,500,000 when meeting the job creation
criteria or a community development goal. Generally, a business must
create or retain one job for every $50,000 provided by the SBA except for
"Small Manufacturers" which have a $100,000 job creation or retention goal
(see below). The maximum SBA debenture is $2.0 million when meeting
a public policy goal.
The public policy goals are as follows:
- Business district revitalization.
- Expansion of exports.
- Expansion of minority business development.
- Rural development.
- Increasing productivity and competitiveness.
- Restructuring because of federally mandated standards or policies.
- Changes necessitated by federal budget cutbacks.
- Expansion of small business concerns owned and controlled by
veterans (especially service-disabled veterans)
- Expansion of small business concerns owned and controlled by women.
The maximum debenture for "Small Manufacturers" is $4.0 million. A Small
Manufacturer is defined as a small business concern that has:
Its primary business classified in sector 31, 32, or 33 of the North
American Industrial Classification System (NAICS); and All of its
production facilities located in the United States.
In order to qualify for a $4 million 504 loan, the Small Manufacturer must
1) meet the definition of a Small Manufacturer described above, and 2)
either (i) create or retain at least 1 job per $100,000 guaranteed by the
SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or
(ii) improve the economy of the locality or achieve one or more public
policy goals [sections 501(d)(2) or (3) of the SBI Act].
What funds may be used for :
Proceeds from 504 loans must be used for fixed asset projects such as:
purchasing land and improvements, including existing buildings, grading,
street improvements, utilities, parking lots and landscaping; construction
of new facilities, or modernizing, renovating or converting existing
facilities; or purchasing long-term machinery and equipment.
The 504 Program cannot be used for working capital or inventory,
consolidating or repaying debt, or refinancing.
Terms, Interest rates and Fees:
IInterest rates on 504 loans are pegged to an increment above the
current market rate for five-year and 10-year U.S. Treasury issues.
Maturities of 10 and 20 years are available. Fees total approximately
three (3) percent of the debenture and may be financed with the loan.
Collateral:
Generally, the project assets being financed are used as collateral.
Personal guaranties of the principal owners are also required.
Eligible Business:
To be eligible, the business must be operated for profit and fall
within the size standards set by the SBA. Under the 504 Program, the
business qualifies as small if it does not have a tangible net worth in
excess of $7.5 million and does not have an average net income in excess
of $2.5 million after taxes for the preceding two years. Loans cannot be
made to businesses engaged in speculation or investment in rental real
estate.
PROGRAM: Microloan, a 7(m) Loan Program
FUNCTION: Provides short-term loans of up to $35,000 to small
businesses and not-for-profit child-care centers for working capital or
the purchase of inventory, supplies, furniture, fixtures, machinery and/or
equipment. Proceeds cannot be used to pay existing debts or to purchase
real estate. The SBA makes or guarantees a loan to an intermediary, who in
turn, makes the microloan to the applicant. These organizations also
provide management and technical assistance. The loans are not guaranteed
by the SBA. The microloan program is available in selected locations in
most states.
CUSTOMER: Small businesses and not-for-profit child-care centers needing
small-scale financing and technical assistance for start-up or expansion
DELIVERED THROUGH: Specially designated intermediary lenders (nonprofit
organizations with experience in lending and in technical assistance
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