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SBA Loans and Loan Guaranties
When lenders wish to reduce the risk factor in loans to small businesses,
the U.S. Small Business Administration (SBA) programs offer a way
to lower the risk factor to an acceptable level.
SBA 7(a)
The most common SBA loan is the SBA 7(a), or Guaranty Loan. Under
this program, the lender lends its own funds and the SBA guarantees
up to 85 percent of the loan against default. In addition to reduced
risk to the lender, the lender may sell the 85 percent guaranteed
portion of the 7(a) loan on the secondary market. This makes SBA
programs even more attractive to lenders. All banks are eligible
to participate in SBA programs. The 7(a) program is SBA's best
means of helping small firms obtain long-term financing for business
needs such as working capital, machinery, equipment, furniture,
fixtures, leasehold improvements, building acquisition or construction,
and in some cases, debt consolidation. The interest rate on SBA
7(a) loans is usually a variable rate that floats between 2 percent
and 2 3/4 percent over New York PRIME. The loan term varies depending
on the purpose and collateral. For example, a working capital loan
would carry a maximum term of 7years; a real estate loan could carry
a term of 25 years; and a working capital and real estate loan could
carry a combined term of 15 years. In most cases, the maximum SBA
loan guarantee is $1,000,000.
The general upper size limits for SBA eligibility are:
| Retail or service business |
Annual sales less than $3.5 million |
| Wholesaler |
Fewer than 100 employees |
| Manufacturing |
Fewer than 500 employees |
| Farm |
Annual sales less than $500,000 |
If a private lender will not provide financing either on their
own or with SBA's guaranty, a direct SBA loan may be considered
under some circumstances. There is one direct loan program available,
and that is for handicapped people. Currently, funds are scarce
and there tends to be waiting lists.
SBA 504
Another SBA program is the 504 loan. The purpose of this loan
is to stimulate economic growth through job creation and for each
job created, $35,000 of SBA funds may be lent. Loan funds can be
used only for fixed asset acquisition such as land, building, and
equipment. The minimum suggested project size should be about $500,000.
An example of a 504project is:
| Bank |
Fixed Rate |
Total Project Cost |
| First lien |
50% |
$250,000 |
| SBA 504 Debenture |
40% |
200,000 |
| Owner cash injection |
10% |
50,000 |
| |
100% |
$500,000 |
The benefits of this program are the below market and fixed rate interest
on the 504debenture portion of the loan, and the subordination of
the SBA debenture loan to the bank loan, thereby reducing the bank's
risk factor. |
