The Small Business Administration (SBA) exists for the benefit of helping small businesses in a number of capacities. For one, it serves as a guarantor of loans for small business. In other words, small businesses apply for loans through financial institutions and the SBA guarantees those loans in order to make approval more likely. The American Recovery and Reinvestment Act, passed in 2009 by President Barack Obama's Administration, was developed to help banks affected in the financial meltdown on Wall Street in 2008 recover and make credit available to banks for small business lending. That program is now over.
The Basic 7(a) Loan Guaranty Program
The 7(a) loan guaranty program is very valuable for small businesses because it is available for not only existing businesses but also for startup businesses. It is often difficult for startup firms to get a loan, but the SBA guarantee program makes it easier. The loans are guaranteed by the SBA but delivered through commercial lending institutions.
This is the SBA's primary loan guaranty program as it is for businesses that might not be eligible for loans through normal channels. It is flexible in that it is available for a number of different business purposes. 7(a) loans can be used for working capital needs, to buy plant and equipment, to buy and improve land and buildings, and for debt refinancing under special conditions. Loan maturities are up to 10 years for working capital loans and up to 25 years for loans for fixed assets like plant and equipment and land and buildings.
The lenders of 7(a) loans are usually commercial banks called participants. Some non-banks are also participants in the program. The loan guaranty does not cover 100% of the loan. Under the new ARRA Act, the guaranty is 90%, which is a temporary change. The guarantee means that if the borrower defaults, the government will cover the loss for the lender.
The commercial bank structures the loan according to their own requirements and the small business has to make application to that bank using their own application forms and processes. There are also SBA forms and applications to complete. The borrower should develop a positive relationship with the bank and carefully fill out the loan application and any other paperwork required. The borrower may be required to give a presentation to the bank. It's important for the borrower to know how to prepare and apply for a bank loan. It is also important for the borrower to know their creditworthiness
Interest rates on SBA loans are negotiated between the borrower and lender but must not exceed SBA maximums which are pegged to the prime rate. Check the SBA website and with the bank to which you have applied for the going interest rates.
One of the provisions of the ARRA is to temporarily eliminate loan fees from the SBA guaranteed loans. The SBA offers a variety of versions of the 7(a) loan program to serve the various needs of small businesses.
The 504 Loan Program - Certified Development Companies (CDC)
SBA 504 loans are for purposes of community economic development. They are long-term, fixed rate loans for equipment and real estate. These loans are targeted toward small businesses that need "brick and mortar" facilities or major equipment for their operations. 504 loans can't be used for working capital needs or for any form of refinancing or debt consolidation or repayment.
The maximum 504 loan is $1,500,000 when it meets a community development goal or job creation criteria. A business must create or retain one job for every $50,000 provided by the SBA. Businesses that fall in the "Small Manufacturers" category have a $100,000 job creation goal. The maximum 504 loan goes up to $2 million when the business can meet a public policy goal. Public policy goals are listed on the SBA 504 loan site.
SBA 504 loans are associated with Certified Development Companies (CDC). There are about 270 CDCs in the United States. They are nonprofit companies set up to contribute to the economic development of communities. CDCs work with private lenders and the SBA to provide loans for small businesses.
A 504 loan is usually made by a private lender who supplies 50% of the funding with the CDC supplying an additional 40%. The small business is usually responsible for putting up the remaining 10%.
The SBA has started a loan program for veterans, active duty service members who are eligible for the military's Transition Assistance Program, disabled service veterans, reservists and National Guard members, spouses of service members, and widows of service members.
The purpose of this program is for eligible people who want to either start or expand a small business. There is a network of SBA participating lenders nationwide. The loans can be used for most purposes including everything from working capital to real estate purchases. The interest rates for these loans are among the lowest the SBA offers at 2.25% - 4.75% over the prime rate depending on the size and term of the loan.
The loans can be up to $500,000. From $150,000 to $500,000, the SBA will guarantee 75% of the loan and up to $150,000, the guarantee is 85%.More about the Patriot Express Loan Program
The SBA Micro-Loan Program offers small loans to startup businesses or very small, new businesses. Loans are made at the local level through intermediaries which are non-profit lenders in the local community. The maximum loan is $35,000 with the average loan at $13,000. Loans are for a variety of purposes including working capital needs, but they can't be used to pay off debt or buy real estate. The intermediaries who make the loans are required to offer training and assistance to the small businesses who apply for the micro-loans. Small businesses may even be required to participate in training before loans are granted.
Loans are made for a maximum term of six years, but the term of the loan may vary based on the purpose of the loan. Interest rates vary depending on market conditions but the SBA states the interest rates are usually between 8% - 13%. These loans usually require collateral as well as a personal guarantee by the business owner.