SBA’s Role in Providing Business Loans to America’s Small Businesses

The U.S. Small Business Administration (SBA) is an independent Agency of the Executive Branch of the Federal Government. It is charged with the responsibility of providing four primary areas of assistance to American Small Business. These are: Advocacy, Management, Procurement, and Financial Assistance. Financial Assistance is delivered primarily through SBA’s Investment programs, Business Loan Programs, Disaster Loan Programs, and Bonding for Contractors.

SBA Business Loan Programs

SBA administers three separate, but equally important business loan programs. SBA sets the guidelines for the loans while SBA’s partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's Loan guaranty requirements and practices can change however as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.

Federal appropriations are available to the SBA to provide guarantees on loans structured under the Agency's requirements. With a loan guaranty, the actual funds are provided by independent lenders who receive the full faith and credit backing of the Federal Government on a portion of the loan they make to small business.

The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.

In a variation of this concept, community development organizations can get the Government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business.

The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.

PROGRAM: Basic 7(a) Loan Guaranty

FUNCTION: Serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.

Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.

CUSTOMER: Start-up and existing small businesses, commercial lending institutions

DELIVERED THROUGH: Commercial lending institutions

www.sba.gov/financing/sbaloan/7a.html

SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs.

PROGRAM: Certified Development Company (CDC), a 504 Loan Program

FUNCTION: Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases).

CUSTOMER: Small businesses requiring “brick and mortar” financing

DELIVERED THROUGH: Certified development companies (private, nonprofit corporations set up to contribute to the economic development of their communities or regions)

www.sba.gov/financing/sbaloan/cdc504.html

PROGRAM: Microloan, a 7(m) Loan Program

FUNCTION: Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states.

CUSTOMER: Small businesses and not-for-profit child-care centers needing small-scale financing and technical assistance for start-up or expansion

DELIVERED THROUGH: Specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance)

www.sba.gov/financing/sbaloan/microloans.html

PROGRAM: Loan Prequalification

FUNCTION: Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicant’s character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBA’s Office of Field Operations and SBA district offices.

CUSTOMER: Designated small businesses

DELIVERED THROUGH: Nonprofit intermediaries such as small business development centers and certified development companies operating in specific geographic areas.

www.sba.gov/financing/sbaloan/prequalification.html

HOW TO GET AN SBA LOAN

One of the most important sources for small business financing is the Small Business Administration (SBA). The SBA provides short- and long-term loans to eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels.

Note, however, that the SBA does not provide direct loans. Rather, the agency provides guarantees to loans available through the SBA's partner lending institutions, which include many community banks.

The SBA provides loan programs for most business purchases, including purchasing real estate, machineries and equipment, inventory, and working capital.

To be eligible for an SBA loan, the borrower must meet 3 criteria:

1. A strong business plan. Like banks and other financial institutions, the SBA requires the submission of a business plan to see that the entrepreneur possesses a clear understanding of the business they're in, have taken steps to research the market, and studied the prospects of the business. The SBA wants to see detailed plans on how the business can make money and repay the loan.
   
   
2. A good personal credit rating. Credit history serves as a person's gauge for credit worthiness. The borrower's track record in paying their bills will is an important component in the loan application process. The SBA partner banks, which provide the money, conduct a credit examination of the borrower then submits the results to the SBA.
   
   
3. The borrower must have a stake in the business. The SBA wants to see those applying for credit to have a personal investment in their business. In the SBA's view, business owners who have put their own money into the venture are much more likely to push hard for the success of their business. The SBA will require the borrower to contribute at least 25% of the loan amount from his or her personal liquid assets.

SBA Funding in tandem with personal cash from your pension plan:

Now you can get this 25% portion from your 401(k) or IRA account, in cash, without paying any taxes or penalties, by transferring these qualified funds into a PENSION TRANSFER TRUST.

To see if your new business will be eligible for an SBA loan, or to learn more about the pension transfer procedure, please inquire by calling (415) 701-0055 or Contact Us.

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