This article describes the loan plans administered by The Small Business Administration (SBA) of the U.S. Government. The Small Business Administration issues all policy guidelines so that the loan programs function effectively and reach the beneficiaries. It does not itself provide funds directly but acts as a guarantor for the loans provided by its partners, viz. lenders, community development organizations and micro-lending institutions.Small Business Administration administers seven types of loans out of which those that cater to start-up or existing businesses are Small Business Loans, Certified Development Company Loans, Equity Investment (SBIC Program) and the Micro-loan Program.
The loan process
The loan process works as follows:
1. The entrepreneur applies to a lender by using the SBA prescribed application form.
2. The applicant contacts a local lender and discusses the loan proposal in detail. The supporting documents include a detailed business plan, applicant's personal financial statement, credit rating, financial statement of the business, proof of collateral, business earnings, management resumes of all personnel involved in running the business and pro-forma balance sheets.
3. If the supporting documentation is satisfactory, the application is approved and the loan is advanced.
If the supporting documentation is weak, the lender submits the application to Small Business Administration and obtains a guaranty. In case there is a repayment default, the Small Business Administration safeguards the lender by reimbursing up to the percentage of SBA's guaranty.
Interest rate on SBA loans;
The Small Business Administration does not set the interest rate. The interest rate is negotiated between the lender and the borrower and depends on the type of loan availed.
Terms of repayment:
The loan terms are, in general, between 5 and 25 years and depend on specific circumstances and cash needs.
Basic 7(a) Loan Program
This loan program caters to start-up and existing small businesses including commercial lenders. All 7(a) loans are guaranty based.
Certified Development Company (504) Loan Program
These are long-term, fixed-rate loans used to finance major fixed assets, such as land and buildings. To qualify for the loan, the business must function with a community development goal or any of the following public policy goals:
1. Business district revitalization
2. Expansion of exports
3. Expansion of minority business development
4. Rural development
5. Increasing productivity and competitiveness
7. Expansion of small business concerns owned and controlled by
8. Veterans (especially service-disabled veterans)
9. Expansion of small business concerns owned and controlled by women
The maximum debenture for businesses qualifying as "Small Manufacturers" is $4.0 million. The beneficiary should have all its production facilities located in the United States and operate its primary business as classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS).
Terms and fees:
These are long term loans of 10 and 20 years. The interest and fees of the loan vary and depend on specific factors such as repayment capability and financial standing.
Any development and profit oriented business with tangible net assets below $7 million and net income of less than $2.5 million after taxes for the preceding two years is considered to be a "Small Business".
The Small Business Investment Company (SBIC) Program
In addition to offering financial assistance to borrowers, these loan programs serve as investment opportunities. The Small Business Investment Companies provide some equity capital, longterm loans as well as management assistance to qualifying small businesses.
Specialized Small Business Investment Companies (SSBIC) provide financial assistance exclusively to small businesses owned by socially or economically disadvantaged persons or communities.
It provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers at start-up or expansion stages for purchasing machinery and/or equipment. These loans are advanced by designated intermediaries who are nonprofit organizations with expertise in money lending as well as providing management and technical assistance to the beneficiaries.
Application is submitted to the local intermediary.
Terms, interest rates and fees:
The maximum loan term is six years. However, loan terms, interest rate and fees may vary according to the size of the loan, the planned allocation of funds, requirements of the intermediary lender, and the specific needs of the borrower.
Loan Prequalification Program
Beneficiaries of this program include low income individuals, disabled business owners, new and emerging businesses, veterans, exporters and those engaged in rural and specialized industries.
This program includes an additional advantage in that, organizations, designated as intermediaries assist the borrowers in the loan process. They consider all relevant qualifying factors of the borrower, develop loan application packages that are most appropriate for the borrowers, and assist in securing the loans. Each intermediary works jointly with the applicant to make sure the business plan is complete and that the applicant meets all the eligibility criteria and is credit worthy. After this preliminary process, the intermediary organization forwards the application to the Small Business Administration for processing.
Identifying an Intermediary:
Small Business Administration Offices located in different parts of the U.S. are an excellent resource to identify a pre-qualification intermediary. Small Business Development Centers are also designated intermediaries. The advantage of these Centers is that they do not charge any fee for loan packaging.
The Prequalification Process:
Once the borrower submits the application, the Small Business Administration assesses the application. If it assesses the applicant to be eligible and is credit worthy, it will issue a commitment letter, known as 'Pre-qualification' letter, on behalf of the applicant. This letter is an indication to the lender that the SBA would be willing to guaranty the loan under certain terms and conditions.
The intermediary also helps the applicant locate the most suitable lender so that the terms are competitive.
The applicant takes the loan application, supporting documents and the pre-qualification letter to the lender for consideration.
This program, which considers the applicant's character and credit worthiness heavily, is administered by the Small Business Administration's Office of Field Operations and is implemented in district offices of the SBA.
Other SBA business loan programs
In addition to the above loan programs, the SBA administers Economic Injury Disaster Loans, Physical Disaster Loans and Military Reservist Economic Injury Loans. The first two cater to businesses affected in Disaster areas and the other is meant to assist small businesses for meeting essential operating expenses rendered impossible because an employee is "called-up" as a military reservist.
Programs for women
The Small loansBusiness Administration has also developed many programs and services for women entrepreneurs to help them succeed. One example in this direction is the "MyBiz for Women" program.