Small Business Administration (SBA) Loan Programs

The U.S. Small Business Administration (SBA) is strongly committed to getting businesses and communities up and running by providing Capital (via 5,000 private banks), Contracts (some 23% of all federal contracts designated to small businesses) and Counseling (through their 14,000 SBA affiliated counselors).

Overview: SBA Loan Programs

While the SBA offers a lot of programs in addition to guaranteeing loans to small businesses, the following focuses solely on the Small Business Administration's capital programs - be it small business loans or private equity investments and loans.

Histroy: "Since its founding on July 30, 1953, the U.S. Small Business Administration has delivered millions of loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses.

SBA was officially established in 1953, but its philosophy and mission began to take shape years earlier in a number of predecessor agencies, largely as a response to the pressures of the Great Depression and World War II."

Today, the SBA offers:

Three general small business loan programs:

• 7(a) Loan Programs -

  This is their general loan program designed to help businesses secure land, buildings, and new construction or to purchase equipment, machinery, fixtures, furniture, supplies and materials as well as for long- and short-term working capital or season business needs. These programs also cover the purchase of existing businesses.

• CDC / 504 Loan Program -

  These programs are joint ventures with local Certified Development Companies (CDCs), private lenders and the SBA to spur small business growth in local communities. These loans can be used for almost any business's fixed asset need with the exception of working capital or inventory, consolidating or repaying debt, or refinancing.

• Micro Loan Programs -

  These programs, through designated intermediaries, are designed to provide new and existing businesses with short-term capital needs for working capital, inventory, fixtures and equipment. In addition, these intermediaries are required to provide technical and training assistance to all their borrowers.

A small business bond program:

• Surety Bonds -

  Bid, Payment and Performance Bonds designed to ensure that should your business contract with another entity that the entity completes the contract to your satisfaction or the Surety (the SBA) will either find another contractor or compensate your business for any losses.

  These bonds will also guarantee that all contractors or subcontractors are paid for their services. These bonds are required for all government contract projects.

Two small business venture capital programs:

• The New Market Venture Capital Companies Program -

  This program is a joint venture between the SBA and private venture capital investing firms. Through this program, businesses in low income areas can assess equity capital investments as well as receive technical assistance to create quality employment opportunities and build wealth within these areas.

• Small Business Investment Companies (SBIC) -

  Similar to the New Market Venture Capital Companies Program, the SBA matches private equity funds with certain venture capital firms who in turn make investments or long-term loans to qualifying small businesses.

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SBA Loan Programs

7(a) Loan Programs

These are the SBA's primary loan programs for start-up and existing businesses to acquire or construct real estate, purchase machinery and equipment or obtain working capital as well as to purchase an existing business.

These loans are underwritten by a SBA qualified bank and then guaranteed by the SBA.

These loans usually come with terms of 10 years to 25 years - making repayment that much more affordable for the business borrower.

To apply, businesses must first apply through a participating bank or non-bank lender. That bank or lender will underwrite the loan by evaluating the borrower's credit, income and collateral (if necessary). However, if the bank is unwilling to fund the loan request and the borrower is strong enough, the bank or lender will submit the request to the SBA for a guarantee.

The SBA will then underwrite the loan based on their criteria and if they find it to be sufficient -will authorize to guarantee a portion of the loan.

The original bank or lender will then fund the loan and service it for the length of its term.

The SBA's guarantee is only for a portion of the loan (not the entire loan) and can only be invoked should the borrower default on his/her payments - Meaning that the bank and the SBA shares the risk with the larger portion being undertaken by the bank.

In addition to the general 7(a) loan program, the SBA offers the following:

• Express & Pilot Programs -

  A streamlined loan procedures for active duty military personnel, veterans, and borrowers from distressed communities.

  These programs include the Community Express and Patriot Express programs and can be used for start up costs, to purchase equipment, business-occupied real-estate purchases, inventory, working capital, expansion, selling goods and services to the government and recovery from declared disasters.

• Export Loan Program -

  Designed to help small businesses develop or expand their export activities to include the:

  Export Express Program - $500,000 in an loan or line of credit to be used for nearly any exporting activity to include attending foreign trade shows or providing customer letters of credit,

  Export Working Capital Program - A 90% guarantee to participating banks and lenders to provide working capital loans and lines to small exporting operations to include advances against export orders, receivables and letter of credit,

  International Trade Loan Program - up to $1.75 million to help exporters expand in their current foreign markets, develop new export markets or for those businesses hurt by competing imports,

  SBA and Ex-Im Bank Co-Guarantee Program - up to $2 million in short-term working capital co-guaranteed by both organizations.

• Rural Business Loan Programs -

  Loan programs for businesses in rural areas facing the challenges of population loss, economic dislocation, and high unemployment.

  These small (up to $350,000) loans are streamlined to help ensure that these businesses either do not suffer any losses or at least minimizes all losses due to adverse economic conditions in their rural or distressed areas.

• Special Purpose Loans Program -

  7(a) loans to aid small businesses that have been impacted by NAFTA, to provide financial assistance to Employee Stock Ownership Plans, and to help implement pollution control mechanisms.

More About 7(a) Loan Programs

CDC / 504 Loan Program

The overall goal of these programs are designed to help local communities support their local businesses who in turn provide economic stimulus back into their communities

These loans provide small businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion to include real estate (land, buildings, improvements and upgrades) as well as machinery and equipment.

How these loans work:

Typically, the borrower would secure:

1. Up to 50% of the projects cost from a private lender,
2. A 100% guaranteed loan from their local CDC for up to 40% of the projects cost,
3. Provide the remaining 10% in their own equity.

More About CDC / 504 Loan Programs

Micro Loan Programs

These micro loans, as their name states, are usually for loan amounts of up to $50,000 for existing businesses and up to $35,000 for new businesses.

However, the average amount of these loans are about $13,000.

The idea is to provide a new or existing business with enough capital that the business or owner can handle at any given time. But, as the borrower shows that they can handle that amount, they can return for larger amounts - up to the $50,000 maximum.

Included with the loan funds, these micro lenders are required to provide each borrower with overall business and technical training - another way to ensure that the business survives and prospers and well as continues to operate at a level to repay the loan funds.

Loan proceeds can be used for working capital, inventory, supplies, fixtures and machinery but not to pay existing debts or to purchase real estate.

More About Micro Loan Programs

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SBA Bond Program

Surety Bonds

Surety bonds ensure that all parties (suppliers, contractors, customers) either receive the goods and services they contracted for, ensure payment for those goods and services or are compensated for any loss due to a party not up holding their end of the contract.

There are three types of surety bonds:

• Bid Bond: Guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
• Payment Bond: Guarantees that suppliers and subcontractors will be paid for work performed under the contract.
• Performance Bond: Guarantees that the contractor will perform the contract in accordance with its terms and conditions.

The SBA does not provide these bonds directly but will guarantee them for qualified small businesses.

To apply, simply find your nearest surety bond agent or company and state that you are seeking a SBA guarantee. They will provide you the SBA forms needed.

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SBA Private Equity Programs

New Market Venture Capital Companies Program

The New Market Venture Capital Companies Program is designed to spur economic growth in low-income areas throughout the country.

These areas are typically underserved by both private investors and banks. Thus, these programs are designed to help these areas build both wealth and jobs within their communities.

These private investment firms must make 80% of all their equity investment in "smaller enterprises" in these areas. Smaller enterprises are considered businesses (in these low-income areas) with net annual after-tax profits not exceeding $2 million for the previous 2 years, and net worth not exceeding $6 million.

The private equity companies - through their management - make all investment decisions. They can invest in a business via their common or preferred stock or issue subordinated debt that does not amortize or come with interest payments tied to specific levels of income.

Small Business Investment Companies (SBIC)

This program is designed to assisted smaller firms (businesses usually under the radar of traditional private equity or venture capital firms) in obtaining equity capital for growth and development.

These privately owned investment companies are licensed by the SBA. Through this license, these firms can borrower investment capital with a SBA guarantee. Then, combining those borrowed funds with their own equity funds, will invest or provide long-term debt to "small" businesses - businesses that are deemed, solely by the investment company's management team, to be viable growth companies able to either provide a significant return on investment or make interest payments.

Since most of these firms investment capital (up to three fourths) is borrowed with a SBA guarantee - these firms typically make debt or debt with equity investments in these companies. Thus, these firms can in turn make their own interest payments back to the SBA

These investment can come in the form of a loan very similar to a bank loan or traditional business loan or in a debt instrument that can be converted in to equity of the investee company (convert into common or preferred shares) should the company begin to realize stronger than anticipated growth.

Like other venture capital or private equity firms, these companies usually have specific markets or industries they invest in as well as look for companies that offer high return potentials and strong management teams that are in large and growing markets.

To qualify, your business (including all parent companies, subsidiaries and affiliates) must have a net worth at $18 million or less with an average after tax net income for the prior two years less than $6.0 million.

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