|SBA structure | History | SBA Loan Programs | SBA Loan Industry | Criticism | SBA 7(a)s | Elegibility | Maturity | Interest Rates | Percentage of Guaranty | SBA Fees | Prepayment Penalties|
Who is Small Business Administration?The Small Business Administration (SBA) is a United States government agency that provides support to small businesses.
What is the Mission of SBA?According to the agency, the mission of the Small Business Administration (SBA) is "to maintain and strengthen the Nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses and by helping businesses and families recover from economic and other disasters."
The agency is also responsible for providing loans to homeowners and renters that have been victims of presidentially declared disasters. Presidential declarations automatically make disaster assistance available to victims if they meet qualifications. The Department of Agriculture and state governors also have the authority to request declarations on areas affected by disasters in their jurisdictions. Over 80% of the loans processed by the agency are for home owners and renters.
Structure of the SBAThe SBA is an independent agency that operates under the authority of the Small Business Act of 1953. The secretary of commerce delegates small business responsibilities to the SBA. The organization and management of the SBA consists of an administrator and deputy administrator, who are appointed by the president and approved by Congress; field office directors; and administrators for the various program areas. The SBA also has associate administrators for the following offices: Disaster Assistance; Field Operations; Public Communications, Marketing, and Customer Service; Congressional and Legislative Affairs; Equal Employment Opportunity and Civil Rights Compliance; Hearings and Appeals; and Management and Administration.
There are also associate administrators for Investment; Small Business Development Centers; Surety Guarantees; regular Government Contracting; and Minority Enterprise Development. Assistant administrators handle International Trade; Native American Affairs; Veterans Affairs; Women's Business Ownership; and Size Standards, and Technology. There is an associate deputy administrator for Government Contracting and Minority Enterprise Development. These offices are then the backup and resource for over 68 field offices that administer the programs and monitor loans. The Inspector General Office audits and maintains the integrity of the loans and the SBA programs.
History of SBAThe SBA was established on July 30, 1953, by the United States Congress with the passage of the Small Business Act. Its function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Also stipulated was that the SBA should ensure a "fair proportion" of government contracts and sales of surplus property to small business. This was accomplished primarily through the Small Business Innovative Research program and government "set-asides."
The SBA also makes loans directly to businesses and acts as a guarantor on bank loans. In some circumstances it also makes loans to victims of natural disasters, works to get government procurement contracts for small businesses, and assists businesses with management, technical and training issues.
The SBA has directly or indirectly helped nearly 20 million businesses and currently holds a portfolio of roughly 219,000 loans worth more than $45 billion making it the largest single financial backer of businesses in the United States.
The SBA has survived a number of threats to its existence. In 1996 the then newly Republican-controlled House of Representatives planned to eliminate the agency. It survived and went on to receive a record high budget in 2000. Renewed efforts by the Bush Administration to end the SBA loan program have met congressional resistance, although the SBA's budget has been repeatedly cut, and in 2004 certain expenditures were frozen.
What are SBA Loan programs?The most visible elements of the administration are the loan programs it administers. The SBA itself does not grant loans with the exception of Disaster Relief Loans. Instead, the SBA guarantees against default certain portions of business loans made by banks and other lenders that conform to its guidelines. Disaster Relief Loans are issued directly from the SBA.
Contrary to popular belief, these programs are not generally for persons with bad credit who can't get bank loans, nor are they primarily used for startup funding; rather, the primary use of the programs are to make loans for longer repayment periods and with looser affordability requirements than normal commercial business loans. Also, a business can qualify for the loan even if the yearly payment would be the same as the previous year's profit, whereas most banks would want payment for a loan to be no more than two-thirds (2/3) of the prior year's profits for a business. The lower payments, longer terms and looser affordability calculations allow some businesses to borrow more money than they could otherwise.
Types of Guaranteed Business Loans through banking institutions include:
Homeowners are eligible for long-term, low-interest loans to rebuild or repair a damaged property to pre-disaster condition. Before making a loan, the SBA must establish the cost of repairing or rebuilding the structure (which is determined by SBA's Loan Verification officers who visit the property), applicant's repayment ability (determined by applicant's credit worthiness and income) and whether the applicant can obtain credit in the commercial market (called the credit elsewhere test). Applicants who do not qualify for disaster assistance loans are then referred to the Federal Emergency Management Agency (FEMA) for grants. Although SBA says it won’t decline a loan for lack of enough collateral, the agency is statutorily required to ask for whatever collateral is available including the damaged property a second home or real estate.
Businesses are also eligible for long-term, low-interest loans to recover from a nationally declared disaster. The means testing used by the SBA seems variable as a recovering business may be eligible for a smaller loan shortly after a disaster, but if the company has not substantially recovered within a short period of time and within the window in which Disaster Loans are still available for that area, the business may be granted a subsequent loan from the SBA for a greater amount. Similar to the homeowner's loan program mentioned above, a small business owner must pledge all their personal assets and acquire a similar pledge from a spouse or partner in the ownership of any shared assets. If defaulted on the loan the souse or partner must surrender their value in the asset(s). The total value of an applicant’s assets is not considered by the SBA therefore a company may be approved for a loan regardless of if that person has little or great net worth.
Once an SBA guaranteed bank loan is approved, the SBA may mail closing documents to the applicant for signature. Disbursements may include an initial unsecured amount of $10,000 and subsequent disbursements pending upon construction progress and continued insurance coverage. After final disbursement, the loan is transferred to the SBA's Office of Capital Assets for management and servicing or collection in the case of default.
Disaster Relief Loans can take many months to be approved. Often forms that are submitted to the SBA must travel to multiple locations and all information provided to them must be verified before any funds are disbursed. This delay in funding can often result in damage to the businesses cash flow, credit and ability to maintain the level of revenue required to repay the loan. The SBA solely determines the amount of the loan they will approve for a business and the business will not be notified of the amount of the loan until one to two business days before the funds are received.
If a business which has a current Disaster Relief Loan defaults on the loan and the business is closed, the SBA will pursue the business owner to liquidate all personal assets. The IRS will withhold any tax refund expected by the former business owner and apply the amount toward the loan balance. After taking possession of all personal assets, the SBA may not pursue the former owner for many years allowing the person to rebuild their personal assets then will renew collection proceedings through a contracted collection agency.
What is SBA Loan Industry
The SBA loan industry can be divided into distinct categories:
Why Criticism of SBABusinesses applying for SBA loans are supposed to be ineligible for financing elsewhere, as the applicant bank affirms. Designed to avoid direct competition with banks, this provision allows the most promising projects to be funded by the private sector, leaving higher risk projects to be picked up by the government, resulting in the government holding a higher share of non-performing loans. Though it accepts higher risk, most SBA borrowers pay their loans; the same loans that lenders affirm could not receive credit elsewhere. The Agency has traditionally had a currency rate on its loans of 90% or more, not meaningfully worse than banks.
Others have attacked the SBA as a fount of corporate welfare. Despite its expenditures, the SBA aids only 0.4% of the entrepreneurs in the United States, if one includes all manner of home-based businesses like lawn-mowing services or quilting or snow shoveling. However, it is consistently the greatest provider of small business credit in the country; not all small businesses seek credit or counseling every year.
The SBA is also one of very few agencies that pays its own way and does not drain the treasury for its loan programs. Price Waterhouse affirmed, some years ago, that the tax revenue generated by only a handful of SBA startup loans more than paid all the operating expenses for the Agency.
One of the primary uses of SBA funding is for business owners to get a loan to buy the property their business occupies. Owning the property and having the business rent the property from the owner is a form of a tax shelter, so the SBA is criticized for aiding tax shelters. Of course, legally taking advantage of tax law provisions is completely ethical.
Various banks are often criticized for offering or writing fewer SBA loans proportionally than other banks, which critics see as a sign of discrimination. However, others counter that SBA loans are equivalent to or many times worse than what the banks offer themselves, so a customer of that bank might choose the normal bank product more often than their SBA product. The SBA has most recently been criticized for the manner in which it disbursed loans earmarked for businesses directly affected by the September 11, 2001 attacks. Lax oversight resulted in widespread abuse of the program as the low-interest loans were awarded to unaffected business including "Dunkin' Donuts shops and florists...motorcycle dealers and chiropractors...a South Dakota country radio station, a Virgin Islands perfume shop and a Utah dog boutique," many of them unaware of the special program.
The events of 9/11 had a broad reaching impact on the US economy and the US Government had determined that specific industries as a whole were affected such as the Airline and Cruise industry. Travel by both means dropped dramatically. Two of the five largest cruse-line operators in the US went out of business as a direct result of the events of 9/11. One of the two largest operators cut their shore-side operating budget by 40% for an unspecified period of time. Although abuses of the SBA Disaster Loan program are expected or known to have occurred, companies such as a tourist based business in the US Virgin Islands would have been substantially damaged and may have gone out of business if not for the program. Similarly, many businesses in the Miami, FL area that depended on the cruise industry were substantially damaged from this event in New York. It is known first hand (my business) was nearly fully dependant on the cruise industry and sales dropped 95% as a direct result of the event with no possibility to recover.
What is SBA Basic 7(a) Loan Program?7(a) loans are the most basic and most used type loan of SBA's business loan programs. Its name comes from section 7(a) of the Small Business Act, which authorizes the Agency to provide business loans to American small businesses.
All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate with SBA in the 7(a) program which expands the availability of lenders making loans under SBA guidelines.
7(a) loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders make and administer the loans.
All 7(a) loans which SBA guaranty must meet 7(a) criteria. The business gets a loan from its lender with a 7(a) structure and the lender gets an SBA guaranty on a portion or percentage of this loan. Hence the primary business loan assistance program available to small business from the SBA is called the 7(a) guaranty loan program.
A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the Government. If the lender is not willing to provide the loan, even if they may be able to get an SBA guaranty, the Agency can not force the lender to change their mind. Neither can SBA make the loan by itself because the Agency does not have any money to lend. Therefore it is paramount that all applicants positively approach the lender for a loan, and that they know the lenders criteria and requirements as well as those of the SBA. In order to obtain positive consideration for an SBA supported loan, the applicant must be both eligible and creditworthy.
What SBA Seeks In A Loan Application?In order to get a 7(a) loan, the applicant must first be eligible. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.
Eligibility factors for all 7(a) loans include: size, type of business, use of proceeds, and the availability of funds from other sources. The following links will provide more detailed information on these eligibility issues.
What are Eligible and Ineligible Types of Business?Types of Business
The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance.
Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.
Business Types and Applicants with Additional Considerations
FRANCHISES - are eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.
RECREATIONAL FACILITIES AND CLUBS - are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.
FARMS AND AGRICULTURAL BUSINESSES - are eligible; however, these applicants should first explore the Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA.
FISHING VESSELS - are eligible; however, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.
MEDICAL FACILITIES - hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they are licensed by the appropriate government agency and services rendered go beyond those of room and board.
An Eligible Passive Company (EPC) is a small entity which does not engage in regular and continuous business activity. An EPC must use loan proceeds to acquire or lease, and/or improve or renovate real or personal property that it leases to one or more Operating Companies for conducting the Operating Company's business. The EPC must comply with the conditions set forth in 13 CFR Sec 120.111.
CHANGE OF OWNERSHIP - Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.
ALIENS - are eligible; however, consideration is given to the type of status possessed, e.g., resident, lawful temporary resident, etc. in determining the degree of risk relating to the continuity of the applicant's business. Excessive risk may be offset by full collateralization. The various types of visas may be discussed in more detail with the local SBA office.
PROBATION OR PAROLE - applications will not be accepted from firms where a principal (any one of those required to submit a personal history statement, SBA Form 912):
This restriction would not necessarily preclude a loan to a business, where a principal had responded in the affirmative to any one of the questions on the Statement of Personal History. These judgments are made on a case by case evaluation of the nature, frequency, and timing of the offenses. Fingerprint cards (available from the local SBA office) are required any time a question on the form is answered in the affirmative.
What are Ineligible Businesses?
Specific types of businesses not eligible include:
REAL ESTATE INVESTMENT firms exist when the real property will be held for investment purposes - as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired.
OTHER SPECULATIVE ACTIVITIES are those firms developing profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business. Dealers of rare coins and stamps are not eligible.
LENDING ACTIVITIES include banks, finance companies, factors, leasing companies, insurance companies (not agents), and any other firm whose stock in trade is money.
PYRAMID SALES PLANS are characterized by endless chains of distributors and sub-distributors where a participant's primary incentive is based on the sales made by an ever- increasing number of participants. Such products as cosmetics, household goods, and other soft goods lend themselves to this type of business.
ILLEGAL ACTIVITIES are by definition those activities which are against the law in the jurisdiction where the business is located. Included in these activities are the productions, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that permits illegal prostitution.
GAMBLING ACTIVITIES include any business whose principal activity is gambling. While this precludes loans to race tracks, casinos, and similar enterprises, the rule does not restrict loans to otherwise eligible businesses, which obtain less than one-third of their annual gross income from either: 1) the sale of official state lottery tickets under a state license, or 2) legal gambling activities licensed and supervised by a state authority.
CHARITABLE, RELIGIOUS, OR OTHER NON-PROFIT or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible.
Use of Proceeds
Ineligible use of Proceeds
Availability of Funds from other sources:
Other Aspects of the Basic 7(a) Loan Program
Maximum Loan Amounts
What is the Maturity term for SBA Loans?SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on: the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.
Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)
When loan proceeds will be used for a combination of purposes, the maximum maturity can be a weighted average of those maturities, which results in level payments. Or, it can be the sum of equal monthly installments on the allowable maturities for each purpose, which results in unequal payments, with a higher requirement for repayment during the initial term of the loan.
Interest Rates Applicable to 7A LoansInterest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate.
Interest rates may be fixed or variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25 percent if the maturity is less than 7 years, and Prime Plus 2.75 percent if the maturity is 7 years or more.
For loans between $25,000 and $50.000, maximum rates must not exceed Prime Plus 3.25 percent if the maturity is less than 7 years, and Prime Plus 3.75 percent if the maturity is 7 years or more.
For loans of $25,000 or less, the maximum interest rate must not exceed Prime Plus 4.25 percent if the maturity is less than 7 years, and Prime Plus 4.75 percent, if the maturity is 7 years or more.
Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the "Federal Register." The lender and the borrower negotiate the amount of the spread which will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must be no more often than monthly and must be consistent, (e.g., monthly, quarterly, semiannually, annually or any other defined, consistent period).
Percentage of Guaranty on 7A LoansFor those applicants that meet the SBA's credit and eligibility standards, the Agency can guaranty up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000. This standard applies to most variations of the 7(a) Loan Program.
However, SBAExpress loans carry a maximum guaranty of 50 percent guaranty. The Export Working Capital Loan Program carries a maximum of 90 percent guaranty, up to a guaranteed amount of $1,000,000.
SBA Fees for 7A LoansTo offset the costs of the SBA's loan programs to the taxpayer, the Agency charges lenders a guaranty fee and a servicing fee for each loan approved and disbursed. The amounts of the fees are based on the guaranty portion of the loans. The lender may charge the upfront guaranty fee to the borrower after the lender has paid the fee to SBA and has made the first disbursement of the loan. The lender's annual service fee to SBA cannot be charged to the borrower.
For loans approved on or after December 8, 2004, the following fee structure applies:
The annual on-going servicing fee for all 7(a) loans approved on or after October 1, 2006 shall be 0.55 percent of the outstanding balance of the guaranteed portion of the loan. The legislation provides for this fee to remain in effect for the term of the loan.
Prepayment Penalties for SBA 7A Loansa. have a maturity of 15 years or more where the borrower is prepaying voluntarily;
b. the prepayment amount exceeds 25 percent of the outstanding balance of the loan; AND
c. the prepayment is made within the first 3 years after the date of the first disbursement (not approval) of the loan proceeds.
The prepayment fee calculation is as follows: