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WHY AN SBA LOAN?
There are three basic reasons why a business owner
would turn to the SBA for a guaranteed loan.
In most instances, bank policy prohibits
lenders from making loans to start up businesses. With
an SBA guarantee, a lender can now. entertain this type
of request.
The terms and conditions provided by
an SBA guaranteed loan allows the borrower a longer term
repayment schedule.
Traditionally, banks require that sufficient
assets be pledged to adequately secure their loans. Often,
there is a collateral deficiency. This, however, does
not preclude an applicant from applying for an SBA guaranteed
loan.
Eligibility
98% of all business are eligible for SBA
Financing. Eligibility is determined by three factors:
1. Type of Business
2. Size of Business
3. Purpose of Loan
1. Type Of Business:
An eligible business must be organized for
profit and must be engaged in or do business in the United
States or its possessions. As stated, most businesses are
eligible. The principal applicant must also meet certain criteria.
The principal business owner (50% or more) must be a U.S.
Citizen or Legal Permanent Resident (“LPR”). Aliens
are eligible; however, consideration is given to the type
of status possessed, e.g., resident, lawful temporary resident,
etc. in determining the degree of risk relating to the continuity
of the applicant's business. Excessive risk may be offset
by full collateralization. The various types of visas may
be discussed in more detail with the local SBA office.
2. Size Of Business:
SBA defines a small business as one that is
independently owned and operated and not dominant in its field.
A small business must also meet the employment or sales standards
developed by the Small Business Administration and based on
the North American Industry Classification System (NAICS).
In general, the following criteria are used by SBA to determine
if a concern qualifies as a small business and is eligible
for SBA loan assistance:
· WHOLESALE - not more than 100 employees;
· RETAIL or SERVICE - Average (3 year) annual sales
or receipts of not more than $5.0 to $21.0 million, depending
on business type;
· MANUFACTURING - Basically not more than 500 employees,
but in some cases up to 1,500 employees;
· CONSTRUCTION - Average (3 year) annual sales or receipts
of not more than $7.0 to $17.5 million, depending on the specific
business type.
3. Purpose Of Loan:
Use Of Proceeds
Loan proceeds may be used to establish a new business or to
assist in the operation, acquisition or expansion of an existing
business. These may include (non-exclusive):
To purchase land or buildings, to cover
new construction as well as expansion or conversion of existing
facilities. SBA can finance up to 90% of the purchase price
of land and building. The applicant business must occupy
at least 50% of the total square footage and 67% for new
construction.
To acquire equipment, machinery, furniture,
fixtures, supplies, or materials;
For long term working capital including
the payment of accounts payable and/or for the purchase
of inventory;
To refinance existing business indebtedness
which is not already structured with reasonable terms and
conditions;
For short term working capital needs including:
seasonal financing, contract performance, construction financing,
export production, and for financing against existing inventory
and receivable under special conditions; or
To purchase an existing business.
Ineligible Use Of Proceeds
There are certain restrictions for the use of SBA loans. The
following is a list of purposes which SBA loans can not finance:
To refinance existing debt where the lender
is in a position to sustain a loss and SBA would take over
that loss through refinancing;
To effect a partial change of business
ownership or a change that will not benefit the business;
To permit the reimbursements of funds
owed to any owner. This includes any equity injection, or
injection of capital for the purposes of the businesses
continuance until the loan supported by SBA is disbursed;
To repay delinquent state or federal withholding
taxes or other funds that should be held in trust or escrow;
and
For a non sound business purpose.
The 7(a) Loan Guaranty Program
is one of SBA's primary lending programs. It provides loans
to small businesses unable to secure financing on reasonable
terms through normal lending channels. The program operates
through private-sector lenders that provide loans which are,
in turn, guaranteed by the SBA -- the Agency has no funds for
direct lending or grants. Most lenders are familiar with SBA
loan programs so interested applicants should contact their
local lender for further information and assistance in the SBA
loan application process. Information on SBA loan programs,
as well as the management counseling and training services offered
by the Agency, is also available from the local SBA office.
A maximum loan amount of $2 million has been established for
7(a) loans. However, the maximum dollar amount the SBA can guaranty
is generally $1 million. 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. SBALowDoc
Loan Program
Further streamlines the
making of small business loans.
The maximum loan-$150,000.
Calls for a response from
the SBA within 36 hours of receiving a complete application.
Guaranty percent follows
7(a) policy
Once a small business borrower
meets the lender's requirements for credit, the lender may
request a guaranty from the SBA through SBALowDoc procedures.
It's a quick, two-step process:
The borrower completes the
front of the SBA's one-page application, and the lender completes
the back.
The lender submits a complete application to the SBA and receives
an answer within 36 hours.
Interest rates can be negotiated
between the borrower and lender, may be fixed or variable,
are tied to the prime rate (as published in the Wall Street
Journal), and may not exceed the following SBA maximums.
To secure the loan, the borrower
must pledge available business and personally owned assets.
Loans are not declined when inadequate collateral is the only
unfavorable factor.
Personal guaranties of the principals are required.
Maturity
is usually 5 to 10 years. For fixed-asset loans it can be
up to 25 years.
Enhanced
SBAExpress Loan Program
Makes it faster and easier
for lenders to provide SBA guaranteed small business loans
of $250,000 or less.
Allows most lenders to
use SBA's more efficient and streamlined loan review processes.
Includes fewer SBA forms
and procedures.
Offers special lender incentives
to provide very small SBA loans, especially revolving lines
of credit.
Loans processed centrally
with usually instantaneous SBA response.
The SBA's general collateral
policy requires guaranteed loans to be fully secured; with
SBAExpress, lenders are not required to take collateral for
loans up to $25,000 and may use their existing collateral
policy for loans over $25,000 up to $150,000.
Loan maturity generally depends
on the borrower's ability to repay and the use of the loan
proceeds. But note the new SBAExpress allows revolving loans
up to 7 years with maturity extensions permitted at the outset.
Lenders and borrowers can
negotiate the interest rate. Rates are tied to the prime rate
(as published in the Wall Street Journal) and may be fixed
or variable, but they may not exceed SBA maximums:
Lenders may charge up to 6.5
percent over prime rate for loans of $50,000 or less and up
to 4.5 percent over the prime rate for loans over $50,000.
The maximum loan amount for
SBAExpress is $250,000.
Certified Development
Company (504) Loan Program
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. Each CDC covers a specific geographic
area. (Find the CDC in your 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 $1,000,000 for meeting the job
creation criteria or a community development goal. Generally,
a business must create or retain one job for every $35,000
provided by the SBA.
The maximum SBA debenture is $1.3 million
for 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
Enhanced economic competition
Restructuring because of federally mandated
standards or policies
Changes necessitated by federal budget
cutbacks
Expansion of small business concerns owned
and controlled by veterans
Expansion of small business concerns owned
and controlled by women
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:
Interest 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 BUSINESSES:
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 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.
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