U.S. SMALL BUSINESS ADMINISTRATION (SBA) LENDING PROGRAMS

Summary of SBA'S 3 Most Popular Loan Programs

7(a) LOAN GUARANTY PROGRAM

  • SBA Guarantees 80% of deal up to $750,000
  • Bank Initiates Request to SBA - Bank Must Be "On-Board"
  • Rule of Thumb: SBA Usually Requires Around 20% Equity
  • Typically, the SBA Guaranty addresses a Collateral Short Fall
  • Interest Rate Charged - Bank's Market Rate with the following caps:
    • 7 yrs & up - NY Prime plus 2.75%
    • Less than 7 yrs - NY Prime plus 2.25%
  • Guaranty Fee - 2-3% of Guaranty Amt - paid by Customer (can be financed)

SBA's LOW-DOC PROGRAM

  • Deals Under $150K
  • Principals can not have any Police Record
  • Guaranty Fee - 2-3% of Guaranty Amt - paid by Customer (can be financed)
  • No Set Equity %
  • Can't use for refinancing old debt
  • 2 Page Application
  • SBA agrees to notify the bank of approval/denial within 3 days of submission
  • Documentary Requirements still require Proformas, Personal Financial Statements, and Tax Returns
  • Bank Initiates Request to SBA - Bank Must Be "On-Board"
  • Interest Rate Charged - Bank's Market Rate with the following caps:
    • 7 yrs & up - NY Prime plus 2.75%
    • Less than 7 yrs - NY Prime plus 2.25%
    • Loans under $50K may carry a higher Interest Rate

SBA'S 504 LOAN PROGRAM

The 504 Certified Development Company (CDC) Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. This particular program is administered through a regional Certified Development Company, which is a nonprofit corporation set up 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. 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 (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 $750,000 (up to $1 million in some cases). The program is designed to enable small businesses to create and retain jobs; the CDC's portfolio must create or retain one job for every $35,000 provided by the SBA.

  • 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 generally 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 $6 million and does not have an average net income in excess of $2 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
  • Maryland Certified Development Companies For SBA 504 Program
    • Chesapeake Business Finance Corporation, Frederick, MD Phone: 301-668-1844
    • Mid-Atlantic Business Finance Company, Baltimore MD Phone: 410-539-2449

General Information About SBA'S Loan Programs

  • LOAN GUARANTY PROGRAMS: 7(a) AND LOW-DOC The Loan Guaranty Programs are SBA's primary lending programs. They provide loans to small businesses unable to secure financing on reasonable terms through normal lending channels. These programs operate 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 or the Small business Development Center for further information and assistance in the SBA loan application process.
  • LOAN AMOUNTS AVAILABLE UNDER SBA LOAN PROGRAMS For most SBA loans there is no legislated limit to the total amount of the loan that may be requested from the lender. However, the maximum amount the SBA can guaranty is generally $750,000. Thus, with a lender requesting the maximum SBA guaranty of 75 percent, the total loan amount available under this program generally would be limited to $1 million.
  • WHAT SBA SEEKS IN A LOAN APPLICATION 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 principals with an ownership interest of twenty percent (20%) or more are required to personally guarantee SBA loans. The counselors at your local SBDC office can help you pre-qualify your project before visiting your banker.
  • WHO IS ELIGIBLE FOR AN SBA LOAN Although most small businesses are eligible for SBA loans, some types of businesses are ineligible and a case-by-case determination must be made by the Agency. Eligibility is generally determined by the following 3 factors:

    Type of Business The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest ?

    Size of Business The Small Business Act defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. The Act also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences. The SBA has therefore developed size standards that define the maximum size of an eligible small business. As apparent from the following general description of SBA's size standards, most businesses are considered small. However, these represent general definitions that in some cases are further defined by specific SIC code. Also note that the standards for a particular business may change from time to time and some exceptions do apply.

    Industry/Size

    Retail and Service / $3.5 to $13.5 million

    Construction / 7.0 to $17.0 million

    Agriculture / $0.5 to $3.5 million

    Wholesale / No more than 100 employees

    Manufacturing / 500 to 1,500 employees

    When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.

    Use of Loan Funds

    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, machinery, and equipment; purchase of inventory; and, working capital.

    PROCEEDS OF AN SBA LOAN CANNOT BE USED:

    1. to finance floor plan needs;

    2. to purchase real estate where the participant has issued a forward commitment to the builder/developer, or where the real estate will be held primarily for investment purposes;

    3. to make payments to owners or pay delinquent withholding taxes; to pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management. (Proceeds can never be used to reduce the exposure of the participant in the loans being refinanced.)

    For more information on SBA lending programs, contact your local SBDC or visit the SBA web site at http://www.sbaonline.sba.gov/financing/