SBA Loan

SBA financing programs vary depending on a borrower’s needs.SBA-guaranteed loans are made by a private lender and guaranteed upto 80 percent by the SBA, which helps reduce the lender’s risk andhelps the lender provide financing that’s otherwise unavailable atreasonable terms. Here’s a rundown of some popular SBA loanprograms

7(a) Guaranteed Loan Program
The SBA’s primary business loan program is the 7(a) GeneralBusiness Loan Guaranty Program. It’s generally used for businessstart-ups and to meet various short- and long-term needs ofexisting businesses, such as equipment purchase, working capital,leasehold improvements, inventory, or real estate purchase. Theseloans are generally guaranteed up to $750,000. The guaranty rate is80 percent on loans of $100,000 or less and 75 percent on loansmore than $100,000.

The guidelines for SBA guaranteed loans are similar to those forstandard bank loans. In addition, your company must qualify as asmall business according to SBA standards, which vary from industryto industry.

The interest rate charged on SBA guaranteed loans is based onthe prime rate. While the SBA does not set interest rates, sincethey are not the lender, it does regulate the amount of interestthat a lender may charge an SBA borrower. If the loan has a term ofseven years or more, the SBA allows the lender to charge as much as2.75 percent above the prevailing prime rate. If the loan has aterm of less than seven years, the surcharge can be as much as 2.25percent.

You can use the following assets as collateral for an SBAguaranteed loan:

• Land and/or buildings
• Machinery and/or equipment
• Real estate and/or chattel mortgages
• Warehouse receipts for marketable merchandise
• Personal endorsement of a guarantor (a friend who is able andwilling to pay off the loan if you are unable to)
• Accounts receivable
• Savings accounts
• Life insurance policies
• Stocks and bonds

504 Local Development Company Program
The 504 Loan Program provides long-term, fixed-rate financing tosmall businesses to acquire real estate, machinery, or equipment.The loans are administered by Certified Development Companies(CDCs) through commercial lending institutions. 504 loans aretypically financed 50 percent by the bank, 40 percent by the CDC,and 10 percent by the business.

In exchange for this below-market, fixed-rate financing, the SBAexpects the small business to create or retain jobs or to meetcertain public policy goals. Businesses that meet these policygoals are those whose expansion will benefit a business districtrevitalization (such as an Enterprise Zone), a minority-ownedbusiness, or rural development.

The Microloan Program
Established in 1992, the SBA’s Microloan Program offers anywherefrom a few hundred dollars to $25,000 for working capital or thepurchase of inventory, supplies, furniture, fixtures, machineryand/or equipment to businesses that cannot apply to traditionallenders because the amount they need is too small. Proceeds may notbe used to pay existing debts or to purchase real estate. Theseloans are not guaranteed by the SBA but are rather deliveredthrough intermediary lenders, such as nonprofit organizations withexperience in lending.

The Microloan Program is offered in 45 states throughcommunity-based, nonprofit organizations that have qualified as SBAMicroloan lenders. These organizations receive long-term loans fromthe SBA and set up revolving funds from which to make smaller,shorter-term loans to small businesses. According to the SBA, theaverage loan size in 1998 was close to $10,000, with 37 percentgoing to minority-owned businesses and 45 percent awarded towomen-owned companies, groups that have historically had the mostdifficulty obtaining conventional small-business loans.

The SBA also facilitates other types of loans to help owners ofsmall businesses. Loans are available to help small businessescomply with the federal air and water pollution regulations andwith occupational safety and health requirements. Other loans canoffset problems caused by federal actions, such as highway orbuilding construction or the closing of military bases. There areloan programs targeted to relieving economic injuries suffered by asmall business as a result of energy or material shortages ortemporary economic dislocations.

In addition to these loans, the SBA offers the followingprograms:

The SBA uses three primary types of lenders to fund loans:

Not all banks are eligible for either the Bank CertificationProgram or Preferred Lenders Program. Indeed, most preferredlenders tend to be major commercial banks that may have specializedSBA divisions in their organization. Each bank must meet fourcriteria.

1. Experience. A minimum of 10 years’ SBA lending isrequired.
2. Prudence. A good record shows few loans bought back bythe SBA.
3. Community lending. A solid record of loans to localborrowers, especially to minorities and to women, is needed.
4. Assistance to small business. The banks shows a record ofhelping local small firms.

To be considered for any loan funded by or through the SBA,whether you are starting a new business or obtaining capital for anexisting one, you must first meet certain criteria. First of all,the business requesting SBA financing must be independently ownedand operated, not dominant in its field, and must meet employmentor sales standards developed by the agency. Loans cannot be made tospeculative businesses, media-related businesses, businessesengaged in gambling, lending, or investing, recreational oramusement facilities, or nonprofit enterprises.

Loans may not be used to:

• Pay off a creditor who is adequately secured and in a positionto sustain loss;
• Provide funds for distribution to the principals of theapplicant;
• Replenish funds previously used for such purposes;
• Encourage a monopoly or activity that is inconsistent with theaccepted standards of the American system of free competitiveenterprise;
• Purchase property that will be held for sale orinvestment;
• Relocate a business for other than sound businesspurposes;
• Effect a change of ownership unless it will aid in the sounddevelopment of the company or will engage a person hampered orprevented from participating in the free enterprise system becauseof economic, physical, or social disadvantages;
• Acquire or start another business besides the present one;
• Expand to an additional location;
• Create an absentee-ownership business;
• Refinance debt of any kind.

Be fully prepared to prove to the SBA that your company has theability to compete and be successful in its field. Whether you’reseeking a loan for a new concept or an established one, do notunderestimate the importance of the category into which the SBAgroups it. The success or failure of your application may rest onthe classification assigned by the SBA. Determine which field yourbusiness can best compete in, state this in your application, andbe prepared to back up your claim.

To help you address the issue of classification, be aware of howthe SBA formulates its guidelines. A key publication it relies onis the Standard Industrial Classification (SIC) Manual, publishedby the Bureau of the Budget in Washington, DC. The SBA also usespublished information concerning the nature of similar companies,as well as your description of the proposed business. The SBA willnot intentionally work against you, so it’s up to you to steer theagency in the direction most beneficial to you. The standards usedby the SBA for judging the size of a business for purposes ofqualifying for a loan vary from one industry to another.

Product classification and size are not the only things the SBAwill want to know about your business. Whether you’re applying fora loan to finance a new start-up or fund an existing business, theSBA will want to know the following about you and yourbusiness:

• A description of the business you plan to establish;
• Your experience and management capabilities;
• How much money you plan to invest in the business and how muchyou will need to borrow;
• A statement of your present financial position showing allpersonal assets and liabilities;
• A detailed projection of what your business will earn in itsfirst year of operation;
• The collateral you can offer as security for the loan and anestimate of its current market value.

Accuracy is of utmost importance. Keep notes on everything thatgoes into the loan package as backup in the event you are called onto explain or prove a figure or statement on any of thedocuments.