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SBA Loan

what is a sba loan

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.

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