The most visible elements of the SBA 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 is 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.
One of the most popular uses of SBA loans is for commercial mortgages on buildings
occupied or to be occupied by a small business. These programs are beneficial
to the small business because most bank programs frequently require larger down
payments and/or have shorter terms requiring borrowers to refinance every five years.
They can be beneficial to the bank in that the bank can reduce its risk by taking
a first lien position for a smaller percentage of the entire project and then arranging
for a SBA Certified Development Company to finance the remainder through a second
lien position.
Types of Guaranteed Business Loans through banking institutions include:
* Loan Guarantee Program: The 7(a) Loan Guarantee Program
is designed to help small entrepreneurs start or expand their businesses.
The program makes capital available to small businesses through bank and non-bank
lending institutions.
* 504 Fixed Asset Financing Program: The 504 Fixed Asset
Financing Program is administered through non-profit Certified Development Companies
throughout the country. This program provides funding for the purchase or
construction of real estate and/or the purchase of business equipment/machinery.
Of the total project costs, a lender must provide 50% of the financing, a Certified
Development Company provides up to 40% of the financing through a 100% SBA-guaranteed
debenture, and the applicant provides approximately 10% of the financing. Aggressive
vetting of any property purchased through this program is required.
* MicroLoan Program: Available for up to $35,000 through
non-profit, micro loan intermediaries, to small businesses considered unbankable
in the traditional banking industry.
* Economic Development Program: SBA partners such as SCORE
and the Small Business Development Centers (SBDCs), operating in each state, provide
free and confidential counseling and low-cost training to small businesses.
* 8(a) Business Development Program: Assists in the development
of small businesses owned and operated by individuals who are socially and economically
disadvantaged.
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 Field Inspectors who visit the property), the applicant's repayment ability
(determined by applicant's creditworthiness 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 may be referred to the
Federal Emergency Management Agency (FEMA) for grants. Although SBA won’t
decline a loan for lack of collateral, the agency is statutorily required to ask
for whatever collateral is available including the damaged property, a second home
or other real estate.
Businesses are also eligible for long-term, low-interest loans to recover from declared
disasters. Similar to the homeowner's loan program mentioned above, a small
business owner must pledge any available assets and acquire a similar pledge from
a spouse or partner in the case of any shared assets. If defaulted on the
loan, the spouse or partner must surrender their value in the assets. 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 whether that person has little
or great net worth.
Once an SBA loan is approved, the SBA mails closing documents to the applicant for
signature. Disbursements include an initial unsecured amount of $14,000, and
subsequent disbursements depending upon construction progress and continued insurance
coverage. After final disbursement, the loan is transferred to one of the
SBA's servicing offices for management, or to its collections office in the case
of default.
Disaster Relief Loans are often approved within 21 days.
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.