This post is part of a series of posts designed to help you acquire a loan for your small business. The following posts cover methods for public financing of your small business
This is SBA’s most frequently used loan program. A guaranteed loan is one made by a commercial lending institution (usually a bank) to a small business customer. The SBA provides the bank with a guarantee that will pay the bank a portion of the unpaid balance on loans that are not paid in full by the customer. Every bank has its own internal credit standard and policy for approval of its loans. The SBA’s guarantee permits a bank to broaden its own criteria to accommodate additional lending because of the federally-backed assurances. While the guaranty extends the range of credit available through commercial lenders, it will not cover unsubstantiated repayment, poor collateralization, or improperly documented requests. Therefore, it is incumbent on the applicant to find out if the request has a chance and then work with the bank to submit all required documentation first, so that the bank may evaluate the proposal and make its decision. Under this program, the bank analyzes the credit and makes one of three decisions: to approve it entirely by itself; to approve subject to an SBA guaranty; or to decline the loan. Should the second method be chosen, the bank will submit the application to SBA on behalf of both the borrower and itself. Keep in mind that the applicant is the bank’s customer and the bank is SBA’s customer. The prospective borrower does not need to contact the SBA.
General Information. Under the guarantee program [often referred to as the 7(a) program] the lender provides all of the loan amount and the SBA offers it guarantee to the lender. The Small Business Jobs Act of 2010 (signed in September 2010) put in place new guarantee levels effective January 1, 2011. From that date the SBA guarantee is 75 percent of the amount of a loan over $150,000 and 85 percent of a loan up to $150,000. The SBA can guarantee loans of up to $5 million with the guaranteed portion not exceeding $3,750,000. The fee elimination put in place by the earlier Recovery Act was extended to December 31, 2010 but not into 2011, and the amount of fees SBA will charge for guaranteeing the loan are yet to be determined. In the past, loan guarantee fees have not exceeded 3.5 percent of the loan amount. Updated information will be available in the financing programs section of the SBA’s webite at www.sba.gov .
Terms of Loan. The bank and its client (small business) negotiate the terms within the parameters described in the following paragraphs.
Interest Rate: There are two rate structures available on SBA guaranteed loans: fixed and variable. Variable rate loans can be adjusted monthly, quarterly, semi-annually, annually, and float with the prime rate. Fixed-rate loans do not change during the life of the loan. The maximum allowable rate for both types of loans is 2.75 percent over prime for loans of seven years and longer, and 2.25 percent over the prime rate for loans up to seven years. This prime rate is the minimum New York prime rate as published in The Wall Street Journal. Loans under $50,000 may have a higher rate.
Maturity: The length of a loan is determined by the use of the loan proceeds. Working capital loans are generally limited to seven years. Machinery and equipment loans are based on the life of the machinery and equipment, but not to exceed ten years. Real estate loans have maximum maturity of 25 years. These are the maximum terms. The bank may request shorter terms.
Maturity: A business may borrow for anything on the balance sheet such as inventory, receivables, land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, accounts payable. Funds may be used to purchase a business. Generally funds may not be used to effect a change of ownership among family members. If part of the funds are to be used to pay debts owing to the participating bank, additional collateral may be required from the bank.
Collateral: Collateral are those assets which secure a loan in the event of a default. Collateral can consist of the following: land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, inventory, accounts receivable, mortgages on fixed assets held personally, or an assignment of the interest in a contract for deed. SBA can take a second position, if necessary. The collateral offered should be reasonably adequate to secure the loan.
Equity: An applicant must have an adequate capital investment in its own business. For existing businesses, SBA uses the business ratios provided by Dun and Bradstreet and Robert Morris Associates. The SBA considers all credit factors before making a decision.
Repayment: SBA and the bank expect a loan to be paid out of the profits of the business. The bottom line of any credit decision is whether a business can repay the loan and other obligations from earnings. This is determined by analyzing all the facts presented in an application; primarily, management ability, equity invested, financial statements of owners, and detailed justification of projected earnings.
Small/Rural Lender Advantage. The Small/Rural Lender Advantage Initiative is part of SBA’s 7 (a) loan program and encourages smaller and /or rural lenders (making 20 or fewer SBA loans a year) to offer SBA loans by streamlining SBA’s loan application and approval process.
The key features include: the maximum loan size is $350,000; an SBA guarantee of 85 percent is available for loans of $150,000 or less, 75 percent if the loan is larger; and the loan has a short, simplified application, a quick processing time (average 5 days) and fillable PDF application forms that can be faxed or e-mailed. Only limited, key financial documents are required.
International Trade Loans. This program operates under the Guaranteed Loan Program and utilizes the same credit criteria and conditions. SBA may guarantee 90 percent to a maximum of $2 million for fixed asset acquisition and 85 percent to a maximum of $250,000 for working capital. No consolidation of existing debt or refinancing is allowed.
The applicant must establish that the loan proceeds significantly expand existing exports, develop new export markets or must show substantial adverse impact by imports.
SBAExpress. This program alows lenders to make credit decisions directly, without SBA input. Lenders also use all their own documents including the note, security agreement and mortgage. SBAExpress provides a fast turnaround on credit decisions. SBAExpress loans also contain a revolving feature with a seven-year term. SBA guaranties 50 percent of the loan, rather than the 75 to 85 percent under the normal 7(a) program.
SBAExpress interest rates can be higher than those allowed under the basic 7(a) program. Interest rates are determined by the market, but with this program the lender is allowed to charge a rate higher than the 2.25 and 2.75 percent over prime that is normally allowed. The loan limit under this program is $350,000. Lenders need to be approved by SBA for participation in the program. All other eligibility criteria remain the same.
SBA Community Express Loans provide a greater guaranty percentage if the lender agrees to provide technical assistance to the borrower for the term of the loan. SBA Export Express loans also allow a greater guaranty to the lender if the borrower is involved in exporting products or services.
SBA Express loans may be used as a revolver with a limit of seven years.
Patriot Express Loans. The Patriot Express Loan Initiative is a new loan program for veterans and members of the military community wanting to establish or expand a small business.
The program is open to veterans, service-disabled veterans, active-duty service members, participating in the military’s Transition Assistance Program, Reservists and National Guard members, current spouses of any of the above, and the widowed spouse of a service member or veteran who died during service or of a service-connected disability.
The Patriot Express Loan program is a 7(a) loan program offered by the SBA. Loans are available up to $500,000 and qualify for SBA’s maximum guarantee of 85 percent for loans of $150,000 or less and 75 percent for loans over $150,000 up to $500,000. This contrasts with the maximum 50 percent SBA guarantee that applies to all other SBA Express loans. Also, the maximum loan amount under the Patriot Express Loan program is $500,000 compared to the maximum amount of $350,000 available under SBA Express. For loans above $350,000, lenders are required to take all available collateral. Maximum interest rates for Patriot Express loans are the same as those allowed for the 7 (a) program, as opposed to the higher interest rates allowed under the SBA Express program. SBA will allow revolving lines of credit under the Patriot Loan Express Loan program.
The Patriot Express loan can be used for most business purposes, including start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.
Patriot Express loans generally offer 2.25 percent to 4.75 percent over prime depending upon the size and maturity of the loan.
The Patriot Express Loan Program will operate through December 31, 2010.
CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.