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US Small Business Administration Loan Guarantee
The Small Business Administration was established in 1953 to protect the interests of the nation's small business community. The SBA accomplishes this, in part, by working with intermediaries, banks, and other lending institutions to promote both loans and venture capital financing for small businesses. SBA makes small business loans available through its 7(a) Loan Guarantee and 504 Certified Development Company (CDC) programs, and venture capital through its Small Business Investment Company Program (SBIC). SBA-guaranteed loans are made to small businesses through banks and non-bank lenders.
SBA 7(a) Loan Guarantee Program
The 7(a) Loan Guarantee Program is the SBA's primary lending program. Section 7(a) of the Small Business Act authorizes the SBA to guarantee loans to small businesses that cannot obtain financing on reasonable terms through normal lending channels. The program operates through commercial lenders that provide loans that are guaranteed by the SBA.
Loans are available for many business purposes, such as real estate, expansion, equipment, working capital, or inventory. The SBA can guarantee up to 80 percent of loans of $100,000 or less, and up to 75 percent of loans above $100,000. Generally, the maximum guarantee amount is $750,000. For a lender requesting the maximum SBA guarantee of 75 percent, the total loan amount available under this program generally would be limited to $2 million. However, there are some exceptions as presented below in the discussion of specialized loan programs. Maturities can be up to seven years for working capital and up to 25 years for fixed assets. Loans to small businesses are delivered through commercial lending institutions; therefore owners should contact their local bank branch to formulate a SBA loan request.
The repayment ability from the business's cash flow is a primary consideration in the SBA loan decision process. Good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more equity in the company are required to personally guarantee SBA loans.
Restrictions on Eligibility of Businesses
The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit, have reasonable owner equity to invest, and use alternative financial resources (including personal assets). Also, the business must be engaged in, or propose to do business in, the United States or its possessions.
Specific types of businesses not eligible include:
Real estate investment and other speculative activities
Pyramid sales plans
Charitable, religious, or certain other non-profit institutions
The Small Business Act defines an eligible business as one that is independently owned and operated and not dominant in its field of operation. The SBA has developed size standards that define the maximum size of an eligible small business. These, however, represent general industry guidelines.
Industry Size Limitations:
Retail...................$5.0 to $21.0 million in revenues
Service................$2.5 to $21.5 million in revenues
Construction........$7.0 to $27.5 million in revenues
Agriculture...........$0.5 to $9.0 million in revenues
Wholesale............fewer than 100 employees
Manufacturing......500 to 1,500 employees
The proceeds of SBA loans can be used for most business purposes. These may include the purchase of real estate to house the business operations; construction, renovation, or leasehold improvements; acquisition of furniture, fixtures, machines, and equipment; purchase of inventory; and working capital.
SBA loan programs are generally intended to encourage longer-term small business financing, but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. The maximum term depends on the purpose of the loan.
The agency charges lenders a guarantee and a servicing fee for each loan approved. The guarantee fee can be passed on to the borrower once it has been paid by the lender. The fee amount is determined by the amount of the loan guarantee. In addition, all loans will be subject to a fifty-basis-point (1/2 percent) annualized servicing fee, which is applied to the outstanding balance of SBA's guaranteed portion of the loan.
As an illustration of the total cost of capital, consider a $100,000 fixed rate loan with a maturity of less than seven years. Assume the SBA guarantee is for $80,000 and the prime rate is 8 percent. The maximum fixed rate on the $100,000 loan is 10.25 percent (8 + 2.25). The guarantee fee based on the outstanding SBA guaranteed portion of the loan is 2 percent of $80,000. The annual service fee of 1/2 percent is also applied to the outstanding balance of SBA's guaranteed portion of the loan.
SBA 7(a) Certified / Preferred Lenders
SBA loan requests processed by preferred lenders or certified lenders offer logistical advantages over those processed through other lenders. Preferred lenders have actual authority to approve a loan. Loans processed through certified lenders have a shorter turnaround cycle than those processed through ordinary lenders. Applicants should contact their local branch for more information. In addition to commercial banks, there are also several non-bank lenders operating in North Carolina that serve the small business community by processing and servicing loans under the SBA (7a) Loan Guarantee Program. You may obtain a current list of Certified and Preferred lenders through www.sba.gov and selecting "Local SBA Resources" or through 800/827-5722.
Specialized 7(a) Programs
SBALOWDOC LOAN PROGRAM
The SBALowDoc Program was launched in 1993 to simplify the loan application process for small businesses. The program was streamlined in 1998 to provide quicker SBA turnaround and an easier application process. The maximum loan amount is $150,000, with the SBA guaranteeing up to 85 percent of loans under $100,000 and up to 75 percent of loans between $100,000 and $150,000. SBALowDoc loans are available to businesses with 100 or fewer employees with average annual sales for the past three years not in excess of $5 million. Start-up businesses are also eligible.
As with other SBA guaranteed loans, the borrower works with his bank in formulating the loan request. The borrower completes the front of the SBA's one-page application, and the lender completes the back. The bank then submits the completed request to the SBA and receives an answer within 36 hours. Lenders make take advantage of electronic loan processing. To secure the loan, the borrower must pledge available assets and personal guarantees of the principals. Because of the expedited turnaround, the loan decision process relies heavily upon the strength of the principals' character and credit history. Terms, interest rates, and uses are the same as for any 7(a) loan.
Many of the SBCLowDoc loans extended in North Carolina have involved refinancing of existing high-interest debt. Borrowers can save a significant amount on interest by refinancing this type of debt through the SBALowDoc program. Without the SBA guarantee, many banks will not refinance this type of debt. During 1999, SBCLowDoc loans extended in North Carolina totaled 202, representing 34 percent of the total SBA 7(a) guaranteed loan volume in the state. These loans accounted for $16.3 million in funds for North Carolina's small businesses.
The SBAExpress Program is another loan program designed to increase the capital available to businesses seeking loans of up to $150,000. Under this pilot program, certain lenders are authorized to use their existing documentation and procedures to make and service an SBA-guaranteed loan. Bank of America is currently the only North Carolina lender participating in the program. There are no additional forms and no waiting for SBA loan approval. The SBA guarantees up to 50 percent of an SBAExpress loan.
504 Certified Development Company Program
While the SBA is generally a vehicle for investment in disadvantaged businesses and for start-up ventures, mature businesses with proven cash flow and wall-capitalized start-up businesses are more often the recipients of the 504 loan program. The 504 Certified Development Company Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company (CDC) is a non-profit corporation established to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. The 504 Certified Development Company is a channel that allows private funds, guaranteed by SBA, to flow into community businesses.
Typically, a 504 project includes a loan secured with a senior lien in favor of a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (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. The maximum SBA debenture generally is $1,000,000 (up to $1.3 million in some cases). The program is designed to enable small businesses to create and retain jobs. The CDC generally must create one job for every $35,000 provided by the SBA on each loan. There are some exceptions available for certain projects that meet specific public policy goals.
Proceeds from 504 loans must be used for fixed-asset projects. Applicable projects include purchasing or improving land; constructing new facilities; modernizing, converting, or renovating 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.
Interest rates on 504 loans are pegged to an increment above the current market rate of intermediate term US Treasury issues. Maturities of ten and 20 years are available. Fees total approximately 3 percent of the debenture and may be financed with the loan. Generally, the project assets being financed are used as collateral. Personal guarantees of the principal owners are also required. Under the 504 program, the business qualifies as small if it does not have a tangible net worth in excess of $6 million and does not have an average net income in excess of $2 million after taxes for each of the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate. In addition to SBA lending, some regional CDCs may have their own microloan and revolving loan programs. You may obtain a current list of Certified Development Companies by accessing www.sba.gov and selecting the "Local SBA Resources" icon or calling 800/827-5722.
The Export Working Capital Program
The Export Working Capital (EWCP) Program was developed in response to the Guarantee Facilities also can be used to extend medium-term credit to buys of US capital goods and services through banks in certain foreign markets. The program provides competitive, fixed-interest-rate financing for export sales of US capital equipment and related services (usually in excess of $10 million).
The North Carolina Small Business and Technology Development Center became the North Carolina City/State Partner for Ex-Im Bank in 1996. As the City/State Partner, the SBTDC markets the bank's services to small and medium-sized companies that are ready to export. It also markets Ex-Im's programs to commercial banks, teaches seminars, counsels exporters and banks, and may package working capital transactions. Export-Import Bank of the United States - www.exim.gov
Short-term Loans and Revolving Lines of Credit (CPALines)
CAPLines is an umbrella program under which the SBA helps small businesses meet their short-term and cyclical working capital needs. The program is a revolving line of credit that gives small businesses access to short-term credit for up to five years. There are five short-term working-capital loan programs for small businesses under the CAPLines umbrella. These programs are Seasonal, Contract, Builders, Standard Asset-Based, and Small Asset-Based.
A CAPLines loan may be guaranteed for $750,000 or 75 percent of the loan value, whichever is less. A Small Asset-Based loan, however, may be for no more than $200,000. The collateral necessary to obtain a credit line is usually in the form of accounts receivables or inventory. Holders of at least 20 percent ownership in the business are generally required to guarantee the loan. Maximum interest rates are the same as the 7(a) program (except for Standard Asset-Based loans where additional fees may be charged by the lender.)
Community Adjustment and Investment Program
The Community Adjustment & Investment Program (CAIP) was created to help communities suffering job losses due to changing trade patterns following the North American Free Trade Agreement (NAFTA). The North American Development Bank (NADBANK) has partnered with the SBA and the US Department of Agriculture to make credit available to businesses in eligible communities to create or retain jobs. To be eligible, business applicants must be located in a CAIP-eligible community and must be able to demonstrate that the loan or loan guarantee will be used to create or preserve at least one job for every $70,000 in federally guaranteed loans funds they receive over a 24-month period. NADBANK pays the SBA guarantee fee for approved loans. Business located or being established in the following North Carolina counties are eligible for the program: Beaufort, Cherokee, Cleveland, Columbus, Edgecombe, Halifax, Haywood, Hoke, Martin, Nash, Richmond, Robeson, Rutherford, Scotland, Wilson, and Yancey.
Pollution Control Loans
Pollution Control Loans provide loan guarantees to finance the planning, design, or installation of a pollution control facility. This facility must prevent, reduce, abate, or control any form of pollution. Recycling facilities are included. The maximum amount that the SBA can guarantee is $1,000,000, less the amount outstanding on any existing SBA 7(a) loan.
Prequalification Loan Program (Pre-Qual)
The Pre-Qual Loan Program uses intermediaries to assist prospective women, minority, and military veteran borrowers and businesses located in rural areas in developing viable loan application packages and securing loans. Intermediaries from both non-profit and for-profit organizations help prospective borrowers develop a strong business plan and credible loan package. The prospective borrower then applies to the SBA for certification consideration and a loan guarantee. With the SBA guarantee, the applicant may apply to a commercial lender for a loan. The standards for the 7(a) program apply to these loans and the maximum amount is $250,000. For more information www.sba.gov.
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