SBA Loan Definition – Entrepreneur Small Business Encyclopedia

Definition: Term loans from a bank or commercial lending institution that the SBA guarantees as much as 80 percent of the loan principal for

SBA financing programs vary depending on a borrower’s needs.
SBA-guaranteed loans are made by a private lender and guaranteed up
to 80 percent by the SBA, which helps reduce the lender’s risk and
helps the lender provide financing that’s otherwise unavailable at
reasonable terms. Here’s a rundown of some popular SBA loan
programs

7(a) Guaranteed Loan Program

The SBA’s primary business loan program is the 7(a) General
Business Loan Guaranty Program. It’s generally used for business
start-ups and to meet various short- and long-term needs of
existing businesses, such as equipment purchase, working capital,
leasehold improvements, inventory, or real estate purchase. These
loans are generally guaranteed up to $750,000. The guaranty rate is
80 percent on loans of $100,000 or less and 75 percent on loans
more than $100,000.

The guidelines for SBA guaranteed loans are similar to those for
standard bank loans. In addition, your company must qualify as a
small business according to SBA standards, which vary from industry
to industry.

The interest rate charged on SBA guaranteed loans is based on
the prime rate. While the SBA does not set interest rates, since
they are not the lender, it does regulate the amount of interest
that a lender may charge an SBA borrower. If the loan has a term of
seven years or more, the SBA allows the lender to charge as much as
2.75 percent above the prevailing prime rate. If the loan has a
term of less than seven years, the surcharge can be as much as 2.25
percent.

You can use the following assets as collateral for an SBA
guaranteed loan:

  • Land and/or buildings
  • Machinery and/or equipment
  • Real estate and/or chattel mortgages
  • Warehouse receipts for marketable merchandise
  • Personal endorsement of a guarantor (a friend who is able and
    willing to pay off the loan if you are unable to)
  • Accounts receivable
  • Savings accounts
  • Life insurance policies
  • Stocks and bonds

504 Local Development Company Program

The 504 Loan Program provides long-term, fixed-rate financing to
small businesses to acquire real estate, machinery, or equipment.
The loans are administered by Certified Development Companies
(CDCs) through commercial lending institutions. 504 loans are
typically financed 50 percent by the bank, 40 percent by the CDC,
and 10 percent by the business.

In exchange for this below-market, fixed-rate financing, the SBA
expects the small business to create or retain jobs or to meet
certain public policy goals. Businesses that meet these policy
goals are those whose expansion will benefit a business district
revitalization (such as an Enterprise Zone), a minority-owned
business, or rural development.

The Microloan Program

Established in 1992, the SBA’s Microloan Program offers anywhere
from a few hundred dollars to $25,000 for working capital or the
purchase of inventory, supplies, furniture, fixtures, machinery
and/or equipment to businesses that cannot apply to traditional
lenders because the amount they need is too small. Proceeds may not
be used to pay existing debts or to purchase real estate. These
loans are not guaranteed by the SBA but are rather delivered
through intermediary lenders, such as nonprofit organizations with
experience in lending.

The Microloan Program is offered in 45 states through
community-based, nonprofit organizations that have qualified as SBA
Microloan lenders. These organizations receive long-term loans from
the SBA and set up revolving funds from which to make smaller,
shorter-term loans to small businesses. According to the SBA, the
average loan size in 1998 was close to $10,000, with 37 percent
going to minority-owned businesses and 45 percent awarded to
women-owned companies, groups that have historically had the most
difficulty obtaining conventional small-business loans.

The SBA also facilitates other types of loans to help owners of
small businesses. Loans are available to help small businesses
comply with the federal air and water pollution regulations and
with occupational safety and health requirements. Other loans can
offset problems caused by federal actions, such as highway or
building construction or the closing of military bases. There are
loan programs targeted to relieving economic injuries suffered by a
small business as a result of energy or material shortages or
temporary economic dislocations.

In addition to these loans, the SBA offers the following
programs:

State Business
and Industrial Development Corporations (SBIDCs)
are
capitalized through state governments. They usually offer long-term
loans (from 5 to 20 years) for either the expansion of a small
business or for the purchase of capital equipment. Lender
requirements and rates of interest vary from state to state. Some
SBIDCs will commit funds to very high-risk ventures, whereas others
will look for minimal risk.

CDC-504 loans
provide fixed-asset financing through Certified Development
Companies (CDCs). These nonprofit corporations are sponsored by
private-sector organizations or by state and local governments to
contribute to economic development. The 504 CDC Loan Program is
designed to enable small businesses to create and retain jobs-the
rule of thumb is one job for every $35,000 provided by the
SBA.

Community
Adjustment and Investment Program loans
aim to create new,
sustainable jobs and preserve existing jobs in businesses at risk
as a result of changing trade patterns with Canada and
Mexico.

Energy and
Conservation loans
are for small businesses engaged in
engineering, manufacturing, distributing, marketing, and installing
or servicing products or services designed to conserve the nation’s
energy resources.

The Export
Working Capital Program
provides short-term loans to small
businesses for export-related transactions.

The Export-Import
Bank (EXIMBANK)
provides working capital for smaller companies
to finance export and foreign marketing operations.

The Small
Business Innovation Research Program (SBIR)
offers an exciting
opportunity for small businesses to benefit from more than $1
billion in federal grants or contracts. The SBIR Program (a result
of the 1982 Small Business Innovation Development Act) promotes
research and development for American-owned small businesses with
500 or fewer employees.

The SBA uses three primary types of lenders to fund loans:

Infrequent
participant lenders
are bank and nonbank lending institutions
that deal with the SBA on a sporadic basis. An infrequent lender
sends the SBA all paperwork involved with any particular loan
guarantee situation. The SBA does an independent analysis of the
plan and determines whether it will guarantee the loan that the
institution is going to give the borrower.

Certified
lenders
are lending institutions that participate with the SBA
on a regular basis and have a staff trained and certified by the
SBA. Under this program, the lender reviews all the paperwork and
decides whether the borrower merits a loan but gives the SBA the
final word. Only after the lender has approved the loan does the
SBA review the documents, and then they have only three days to do
so.

Preferred
lenders
are certified lenders that have graduated to the top of
the list based on performance. The SBA designates its “best and
most reliable lending partners” as preferred lenders and gives them
final approval on loans.

Not all banks are eligible for either the Bank Certification
Program or Preferred Lenders Program. Indeed, most preferred
lenders tend to be major commercial banks that may have specialized
SBA divisions in their organization. Each bank must meet four
criteria.

1. Experience. A minimum of 10 years’ SBA lending is
required.
2. Prudence. A good record shows few loans bought back by
the SBA.
3. Community lending. A solid record of loans to local
borrowers, especially to minorities and to women, is needed.
4. Assistance to small business. The banks shows a record of
helping local small firms.

To be considered for any loan funded by or through the SBA,
whether you are starting a new business or obtaining capital for an
existing one, you must first meet certain criteria. First of all,
the business requesting SBA financing must be independently owned
and operated, not dominant in its field, and must meet employment
or sales standards developed by the agency. Loans cannot be made to
speculative businesses, media-related businesses, businesses
engaged in gambling, lending, or investing, recreational or
amusement facilities, or nonprofit enterprises.

Loans may not be used to:

  • Pay off a creditor who is adequately secured and in a position
    to sustain loss;
  • Provide funds for distribution to the principals of the
    applicant;
  • Replenish funds previously used for such purposes;
  • Encourage a monopoly or activity that is inconsistent with the
    accepted standards of the American system of free competitive
    enterprise;
  • Purchase property that will be held for sale or
    investment;
  • Relocate a business for other than sound business
    purposes;
  • Effect a change of ownership unless it will aid in the sound
    development of the company or will engage a person hampered or
    prevented from participating in the free enterprise system because
    of economic, physical, or social disadvantages;
  • Acquire or start another business besides the present one;
  • Expand to an additional location;
  • Create an absentee-ownership business;
  • Refinance debt of any kind.

Be fully prepared to prove to the SBA that your company has the
ability to compete and be successful in its field. Whether you’re
seeking a loan for a new concept or an established one, do not
underestimate the importance of the category into which the SBA
groups it. The success or failure of your application may rest on
the classification assigned by the SBA. Determine which field your
business can best compete in, state this in your application, and
be prepared to back up your claim.

To help you address the issue of classification, be aware of how
the SBA formulates its guidelines. A key publication it relies on
is the Standard Industrial Classification (SIC) Manual, published
by the Bureau of the Budget in Washington, DC. The SBA also uses
published information concerning the nature of similar companies,
as well as your description of the proposed business. The SBA will
not intentionally work against you, so it’s up to you to steer the
agency in the direction most beneficial to you. The standards used
by the SBA for judging the size of a business for purposes of
qualifying for a loan vary from one industry to another.

Product classification and size are not the only things the SBA
will want to know about your business. Whether you’re applying for
a loan to finance a new start-up or fund an existing business, the
SBA will want to know the following about you and your
business:

  • A description of the business you plan to establish;
  • Your experience and management capabilities;
  • How much money you plan to invest in the business and how much
    you will need to borrow;
  • A statement of your present financial position showing all
    personal assets and liabilities;
  • A detailed projection of what your business will earn in its
    first year of operation;
  • The collateral you can offer as security for the loan and an
    estimate of its current market value.

Accuracy is of utmost importance. Keep notes on everything that
goes into the loan package as backup in the event you are called on
to explain or prove a figure or statement on any of the
documents.