SBA financing programs vary depending on a borrower's needs. SBA-guaranteed loans are made by a private lender and guaranteed up to 80 percent by the SBA, which helps reduce the lender's risk and helps the lender provide financing that's otherwise unavailable at reasonable terms. Here's a rundown of some popular SBA loan programs
7(a) Guaranteed Loan Program
The SBA's primary business loan program is the 7(a) General Business Loan Guaranty Program. It's generally used for business start-ups and to meet various short- and long-term needs of existing businesses, such as equipment purchase, working capital, leasehold improvements, inventory, or real estate purchase. These loans are generally guaranteed up to $750,000. The guaranty rate is 80 percent on loans of $100,000 or less and 75 percent on loans more than $100,000.
The guidelines for SBA guaranteed loans are similar to those for standard bank loans. In addition, your company must qualify as a small business according to SBA standards, which vary from industry to industry.
The interest rate charged on SBA guaranteed loans is based on the prime rate. While the SBA does not set interest rates, since they are not the lender, it does regulate the amount of interest that a lender may charge an SBA borrower. If the loan has a term of seven years or more, the SBA allows the lender to charge as much as 2.75 percent above the prevailing prime rate. If the loan has a term of less than seven years, the surcharge can be as much as 2.25 percent.
You can use the following assets as collateral for an SBA guaranteed 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 and willing 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 to small businesses to acquire real estate, machinery, or equipment. The loans are administered by Certified Development Companies (CDCs) through commercial lending institutions. 504 loans are typically 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 SBA expects the small business to create or retain jobs or to meet certain public policy goals. Businesses that meet these policy goals are those whose expansion will benefit a business district revitalization (such as an Enterprise Zone), a minority-owned business, or rural development.
The Microloan Program
Established in 1992, the SBA's Microloan Program offers anywhere from a few hundred dollars to $25,000 for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment to businesses that cannot apply to traditional lenders because the amount they need is too small. Proceeds may not be used to pay existing debts or to purchase real estate. These loans are not guaranteed by the SBA but are rather delivered through intermediary lenders, such as nonprofit organizations with experience in lending.
The Microloan Program is offered in 45 states through community-based, nonprofit organizations that have qualified as SBA Microloan lenders. These organizations receive long-term loans from the SBA and set up revolving funds from which to make smaller, shorter-term loans to small businesses. According to the SBA, the average loan size in 1998 was close to $10,000, with 37 percent going to minority-owned businesses and 45 percent awarded to women-owned companies, groups that have historically had the most difficulty obtaining conventional small-business loans.
The SBA also facilitates other types of loans to help owners of small businesses. Loans are available to help small businesses comply with the federal air and water pollution regulations and with occupational safety and health requirements. Other loans can offset problems caused by federal actions, such as highway or building construction or the closing of military bases. There are loan programs targeted to relieving economic injuries suffered by a small business as a result of energy or material shortages or temporary economic dislocations.
In addition to these loans, the SBA offers the following programs:
The SBA uses three primary types of lenders to fund loans:
Not all banks are eligible for either the Bank Certification Program or Preferred Lenders Program. Indeed, most preferred lenders tend to be major commercial banks that may have specialized SBA divisions in their organization. Each bank must meet four criteria.
1. Experience. A minimum of 10 years' SBA lending is
2. Prudence. A good record shows few loans bought back by the SBA.
3. Community lending. A solid record of loans to local borrowers, especially to minorities and to women, is needed.
4. Assistance to small business. The banks shows a record of helping 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 an existing one, you must first meet certain criteria. First of all, the business requesting SBA financing must be independently owned and operated, not dominant in its field, and must meet employment or sales standards developed by the agency. Loans cannot be made to speculative businesses, media-related businesses, businesses engaged in gambling, lending, or investing, recreational or amusement facilities, or nonprofit enterprises.
Loans may not be used to:
- Pay off a creditor who is adequately secured and in a position to sustain loss;
- Provide funds for distribution to the principals of the applicant;
- Replenish funds previously used for such purposes;
- Encourage a monopoly or activity that is inconsistent with the accepted standards of the American system of free competitive enterprise;
- Purchase property that will be held for sale or investment;
- Relocate a business for other than sound business purposes;
- Effect a change of ownership unless it will aid in the sound development of the company or will engage a person hampered or prevented from participating in the free enterprise system because of 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 the ability to compete and be successful in its field. Whether you're seeking a loan for a new concept or an established one, do not underestimate the importance of the category into which the SBA groups it. The success or failure of your application may rest on the classification assigned by the SBA. Determine which field your business can best compete in, state this in your application, and be prepared to back up your claim.
To help you address the issue of classification, be aware of how the SBA formulates its guidelines. A key publication it relies on is the Standard Industrial Classification (SIC) Manual, published by the Bureau of the Budget in Washington, DC. The SBA also uses published information concerning the nature of similar companies, as well as your description of the proposed business. The SBA will not intentionally work against you, so it's up to you to steer the agency in the direction most beneficial to you. The standards used by the SBA for judging the size of a business for purposes of qualifying for a loan vary from one industry to another.
Product classification and size are not the only things the SBA will want to know about your business. Whether you're applying for a loan to finance a new start-up or fund an existing business, the SBA will want to know the following about you and your business:
- 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 much you will need to borrow;
- A statement of your present financial position showing all personal assets and liabilities;
- A detailed projection of what your business will earn in its first year of operation;
- The collateral you can offer as security for the loan and an estimate of its current market value.
Accuracy is of utmost importance. Keep notes on everything that goes into the loan package as backup in the event you are called on to explain or prove a figure or statement on any of the documents.