Getting a small business loan in the United States isn't easy.
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However, the Small Business Administration (SBA) helps ease small business access to credit through its government-backed small business loan programs.
Here are the most popular government-backed small business loan programs:
SBA 7(a) Government-Backed Small Business Loan
First things first. Understand that the SBA itself does not offer SBA 7(a) loans to small businesses. However, through its very popular SBA 7(a) lending program, the SBA will guarantee loans made by commercial lending institutions.
If a small business owner defaults on a guaranteed SBA 7(a) loan, the lender may request that the SBA purchase the guaranteed portion. The borrower is not off the hook, however. All owners of 20 percent or more are required to personally guarantee SBA loans. In other words, if you default, the bank may be made whole by the SBA, but the SBA can still come after you for the outstanding loan balance.
Start-up companies and existing small businesses can take advantage of this program and get an SBA 7(a) loan. In deciding whether you qualify for this SBA loan type, the lender will mainly consider your ability to repay the loan from the cash flow of the business. Other considerations include character of the entrepreneur, management capability, collateral, and the business owner's equity contribution.
The repayment term is generally between five and twenty-five years. The loan term for an SBA loan depends on the life of the assets being financed and the cash needs of the business. Working capital loans have a shorter term and typically must be repaid in five to ten years.
Now is a good time to apply for an SBA 7(a) loan because, as part of the stimulus package, Congress has eliminated fees for the major SBA loan guarantee programs and increase the guarantee level for the 7(a) program to 90 percent. For bankers, that means there is little risk to the bank, and they should be more eager to lend than they have been in the past.
SBA Patriot Express Loans
These loans are similar to SBA 7(a) loans but they are specifically geared for the military community. That includes all veterans, service-disabled veterans, reserve guard members, military spouses, discharged-in-service members, and military widows. The SBA historically has guaranteed a higher percentage on this loan type than they do on most other loans. As such, they are attractive to banks. In addition, Patriot Express Loans can be approved in an expedited manner.
SBA Microloans are different from SBA 7(a) loans in one very significant way. With SBA Microloans, the SBA lends money to an intermediary organization, typically a local nonprofit. They, in turn, make a loan to a small business owner. These are small business loans, with the emphasis on the word small.
The loan cannot be more than $35,000. In fact, the average SBA microloan is about $13,000. The maximum term for the loan is six years, which isn't bad given that the loan amounts are so small. Interest rates might range from between, say, 8 percent to 13 percent.
These microloans typically come with some technical assistance and the small business loan can be used for things like working capital, supplies, furniture, fixtures, and equipment. Just like the SBA 7(a) loans, you may have to personally guarantee your microloan.
CDC 504 Program
The SBA may be located in Washington DC, but they've done some smart things to build up a local presence in communities across America. One such concept is the Certified Development Company (CDC).
CDCs, located across the country, are nonprofit corporations that are specifically focused on economic development of their surrounding communities. There are approximately 270 CDCs.
By partnering with the SBA and private-sector lenders, CDCs are able to give growing businesses access to long-term, fixed-rate financing for major fixed assets, such as land and buildings.
The loans are referred to as SBA 504 Loans. The maximum loan amount is $1.5 million. However, the SBA 504 loan amount can go up to $2 million if the money is being used to achieve a public policy goal, such as revitalizing a business district or increasing U.S. export sales to other countries.
SBA 504 loan interest rates are tied to the interest rates for U.S. Treasury notes, pegged slightly above Treasury rates. The loan term is typically 10 years to 20 years.
There are some financing fees that you'll also have to pay. They are roughly 3 percent of the loan amount but you can use the loan proceeds to pay the fees. (Update from the Resources for Entrepreneurs Editor: many of these fees are being waived or reduced as part of the Recovery Act.)
You cannot get an SBA 504 loan without having other lenders involved, and you also have to put up some capital yourself. Typically, the business applicant will provide 10% of the capital. To round out the financing, a private investor must provide 50% of the capital required for a project, and the CDC, using SBA funds, will provide 40% of the project cost. Borrowers also must personally guarantee the loan amounts.
To be eligible for a 504 loan from the SBA, you must qualify as a small business based on the SBA definition of a small business. For the 504 Program, your net worth cannot exceed $7.5 million. In addition, you cannot have had an average net income in excess of $2.5 million after taxes for the preceding two years.
Business Physical Disaster Loans
SBA provides low-interest loans to businesses of all sizes to repair or replace business assets that have been damaged or destroyed in a declared disaster
These disaster loans from the SBA are called Business Physical Disaster Loans, or BPDL for short.
If you qualify, getting a business disaster loan is pretty straightforward but there are still some hoops to jump through. The government has to be wary of fraudsters so they can't make it too easy. In fact, you'll need to provide similar information to what you would supply for a typical bank loan. For loans above $14,000, you will need to pledge collateral. On the high side, SBA business disaster loans max out at $2 million.
This is a government-backed loan, but it is not a government-guaranteed loan. For all SBA disaster loans, you have to personally guarantee the loan.
SBA disaster loans are not for expansion or improvements. With rare exceptions, you're being given the loan to restore the business to its pre-disaster condition. If you spend the money on something that you are not supposed to, the penalty is that you have to immediately repay one-and-a-half times the original amount of the loan. To avoid being accused of misdoings, it is wise to keep your receipts and records for three years.
If you do get an SBA business disaster loan, be aware that you won't necessarily get the money all at once. The SBA provides the money in installments, as you need it to repair or replace the damage.
Economic Injury Disaster Loans
If your business was damaged by a disaster and the government has agreed that your area is a declared disaster area, you can get a government loan to provide you with operating funds until your business or private non-profit organization recovers.
These loans are referred to as Economic Injury Disaster Loans, or EIDLs for short.
Unlike the Business Physical Disaster Loans discussed above, the funds provided by EIDLs are not limited solely to replacing or repairing damaged physical assets.
For example, you can use the emergency SBA loans to make payments on short-term notes, accounts payable and installment payments on long-term notes, provided that you could have made the payments if there wasn't a disaster and that the disaster has adversely impacted your ability to make payments now.
To apply for the disaster loan, submit a completed SBA loan application, Applicants must submit a personal financial statement and one for each partner, officer, director and stockholder with 20 percent or more ownership. In addition, SBA requires the principals of the business to personally guarantee repayment of the loan and, in some instances, to secure the loan by pledging additional collateral.
The interest rate on EIDLs cannot exceed 4 percent per year. The term of these loans cannot exceed 30 years.
Military Reservist Economic Injury Disaster Loan Program
In the two previous sections of this article on government-backed loans, we've covered two types of SBA disaster loans: Business Physical Disaster Loans (BPDLs) and Economic Injury Disaster Loans (EIDLs). BPDLs cover things like damaged real estate, machinery, equipment, inventory and supplies. EIDLs provide working capital to small businesses to assist them through the disaster recovery period.
In this section, we discuss a different kind of disaster. Let's suppose that your top sales person is a military reservist and they are called up for duty to go to, say, Iraq.
For your business, it's a disaster, right? Your main revenue generator is leaving the country. But does the SBA consider this to be a disaster that would qualify you for an SBA disaster loan?
Surprisingly, the answer is yes. The SBA has created the Military Reservist Economic Injury Disaster Loan program (MREIDL) to address this situation. With an MREIDL, the SBA will give you money to cover ordinary and necessary operating expenses that you could have met, but now cannot, it because a key employee has been called up for active duty.
Immediately after your employee is called up for military duty, your business can apply for economic injury loan assistance. You can actually apply long after that, but you must apply no later than one year after your employee is discharged or released from active duty.
The money is to be used to pay obligations as they mature until the vital employee returns. The maximum loan term for SBA military absence loans is 30 years, and the interest rate on these SBA disaster loan is currently 4.0%. Collateral is required for all MREIDLs over $50,000. The maximum amount you can borrow is $2,000,000 although the SBA can offer more if a business is a critical source of employment.
Equity Investment (SBIC Program)
If you own a small business, Small Business Investment Companies (SBICs) are an excellent source of equity capital, long term loans and management assistance.
SBICs are privately owned and managed investment funds that have a tight relationship with the SBA. They use their own capital, along with borrowed money from the SBA, to make equity investments and, less often, loans to small businesses. Every SBIC must be licensed by the SBA and they are tightly regulated by the SBA.
The good news for small business owners is that there are 400 SBICs out there, ready to talk with you about your capital needs.
They invest in a broad range of industries and geographies. They are active in many different stages of the investment lifecycle, including startup, expansion, mezzanine financing rounds and even turnaround financing. Each SBIC has its own focus and expertise, so it's important to find an SBIC that fits with your organization and your financing objectives.
Specialized Small Business Investment Companies ("SSBICs") are a unique type of SBIC. They work exclusively with small businesses owned by socially or economically disadvantaged persons.
New Markets Venture Capital Companies Program
New Markets Venture Capital Companies ("NMVCCs") are very similar to the SBIC Program and may be a suitable source of capital for certain businesses.
They invest in smaller enterprises, as defined by SBA regulations. The only caveat is that applicants must be located in low-income geographic areas.
Rural Business Investment Companies
Rural Business Investment Companies (RBICs) target investments in profit-oriented rural enterprises. The program is designed to promote economic development and job creation in rural areas.
The program is similar to the SBIC program – a combination of private and government funds are used to support rural companies.
The Rural Business Investment Program which licenses and oversees the RBICs is a joint initiative between the U. S. Department of Agriculture (USDA) and the Small Business Administration (SBA)
Indian Loans Economic Development
The goal of the Indian Loans Economic Development, a program managed by the Department of the Interior, is to provide financial assistance to Indian tribal governments, Native American organizations, and individual American Indians.
These loans provide Native Americans with funding that their businesses can use for commercial, industrial, agricultural, or other business activities, as long as they benefit Federal Indian Reservation economies.
Lenders who participate in the program gain the benefit of having the loans be guaranteed by the federal government. To apply, the lender needs to work through the local Bureau of Indian Affairs Agency or Tribal Loan Administration Office. The loan guaranty maxes out at 90 percent of unpaid principal and interest, and the guaranty time period cannot exceed 30 years.
The borrower must own at least 20 percent of the equity in the business to qualify for this funding, and the entity must be more than 51 percent Indian owned. The amount of the loan depends on the borrower. Individual business owners and tribal enterprises can get as much as $10,500,000. On the low side, loans clock in at around $150,000. Tribal governments and Native American organizations have a higher cap, with loan amounts not to exceed $12,000,000.
Short-Term Lending Program
The Department of Transportation (DOT) operates a government-backed financing program, the Short-Term Lending Program (STLP), that helps small businesses gain access to the financing they need to participate in transportation-related contracts.
If you are a new, startup business looking to get government transportation contracts, this one is not for you.
This financing is to provide working capital to small companies that have already been awarded a DOT transportation contract.
Such contracts cover things like maintenance, rehabilitation, restructuring, improvement, or revitalization of local, state, or federal transportation modes. Without access to this working capital funding, offered via a revolving credit line, a small company might have trouble starting and delivering on the contract due to cash flow challenges.
Lines of credit issued through this program are managed through cooperative agreements between DOT and Participating Lenders. Loans must be approved by both the Participating Lender and DOT.
The interest rate of the loan is a variable rate tied to the Wall Street Journal Prime Interest Rate. The line of credit covers a one-year period. The applicant can request a renewal (up to five years), as long as they remain eligible. There is an application fee of $150.