The AllBusiness.com Practical Guide to SBA Loans

The AllBusiness.com Practical Guide to SBA Loans Table of Contents:
OVERVIEW				1
SBA LOAN PROGRAMS				2
	Basic Section 7(a) Loan Guaranty Program			2
	Eligibility Criteria			2
		Size		4
		Type of Business		4
		Business Types and Applicants with Additional Considerations		4
		Ineligible Businesses		4
		Use of Proceeds/Ineligible Use of Proceeds		5
		Operate in the U.S. or its Possessions		5
		Repayment		5
	Additional Components of the Basic Section 7(a) Loan Guaranty Program			6
		Maturity of Basic 7(a) Loans		6
		Negotiation of Terms		6
		Maximum Loan Amount and Guaranty		6
		Fees Associated with SBA Loans		6
		Interest Rates		7
		Prepayment Penalties		7
	Special Section 7(a) Loan Guaranty Programs			7
		Export Working Capital Program (EWCP)		8
		Export Express		8
		International Trade Loan Program (ITL)		9
		Defense Loan and Technical Assistance (DELTA) Program		9
		Community Adjustment & Investment Program (CAIP)		10
		Pollution Control Loan Program		10
		CAPLines Loan Program		11
	Prequalification Program			11
	Section 504 Certified Development Company (CDC) Program			12
		Maximum Debenture		12
		Eligibility Requirements for 504 Loans		12
		Use of Proceeds for 504 Loans		13
		Loan Terms for 504 Loans		13
		Collateral for 504 Loans		13
	The MicroLoan Section 7(m) Program			13
		Eligibility Requirements for MicroLoansLoan Terms for MicroLoan		14
		Use of Proceeds for MicroLoan		14
		Collateral for MicroLoan		14
		Credit Requirements for MicroLoan		14
		Technical Assistance for MicroLoan		15
		Applying for a MicroLoan		15
APPLYING FOR AN SBA LOAN				15
	Preparation for Meeting with Your Lender			15
	Checklist of Required Papers for SBA Loans			16
THE SBA WEB SITE				17
SBA KEY REQUIREMENTS				18
FINDING AN SBA OFFICE AND SBA LENDERS NEAR YOU				18
	Business Information Centers (BICs)			18
	Small Business Development Centers (SBDCs)			19
APPENDIX				20
Form 1			Checklist of Required Papers To Be Obtained From Applicants SBA/Bank Financing
Form 2			SBA Form 4 (8-01). SBA Application for Business Loan
Form 3			SBA Form 4, Schedule A (8-01) SBA Schedule of Collateral Exhibit A
Form 4			SBA Form 649 (3-83) SBA Listing Collateral Documents
Form 5			SBA Form 4-L (8-01) SBA Application for SBALowDoc Loan
Form 6			SBA Form 4 (8-01) Short Form SBA Application for Small Business Loan (Short Form)
Form 7			SBA Form 770 (1-87) SBA Financial Statement of Debtor
Form 8			SBA Form 912 SBA Statement of Personal History
Form 9			SBA Form 1244 (03-04) Application for Section 504 Loan
Form 10			SBA Form 793 (3-02) Notice to New SBA Borrowers
Form 11			Income Statement
Form 12			Comparative Income Statement
Form 13			Balance Sheet
Form 14			Comparative Balance Sheet
Form 15			Cash Flow Statement
Form 16			Sample Quarterly Budget

The AllBusiness.com Practical Guide to SBA Loans

Overview
SBA Loan ProgramsBasic Section 7(a) Loan Guaranty Program

• Eligibility Criteria
• Additional Components of the Section 7(a) Loan Program
• Special Purpose 7(a) Loan Guaranty Programs
• Section 504 Certified Development Company Loan Program
• Section 7(m) MicroLoans

Applying for an SBA Loan
The SBA Web Site
SBA Key Requirements
Finding an SBA Office and SBA Lenders Near You

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Overview

This Guide will provide you with valuable information regarding the Small Business Administration's Business Loan Programs, which is one of the significant areas of financial assistance provided by the SBA.

The SBA was established in 1953 and is an independent Agency of the Executive Branch of the Federal Government charged with the responsibility of providing four primary areas of assistance to American small business, which include: Advocacy, Management, Procurement, and Financial Assistance. Financial Assistance is delivered primarily through SBA's Investment Programs, Business Loan Programs, Disaster Loan Programs, and Bonding for Contractors.

The stated mission of the SBA is to "maintain and strengthen the nation's economy by aiding, counseling, assisting and protecting the interests of small businesses and by helping families and businesses recover from national disasters."

The SBA Web site (www.sba.gov) is an excellent resource for small businesses. It is very well organized, easy to navigate, and provides a wealth of information. The SBA Web site is referred to throughout this Guide, and is discussed below in a separate section.

SBA Loan Programs

The SBA offers a variety of loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private lenders and other institutions, and not a lender itself. The SBA's several business loan programs supplement the ability of certain lenders to provide both long- and short-term financing to small businesses that might not otherwise qualify for loans through traditional lending sources.

The SBA may not guarantee a loan if a business can obtain funds on reasonable terms from a bank or other source.

There are three basic types of SBA Loan Programs, and several special purpose categories of Section 7(a) loans, including:

• The Basic Section 7(a) Loan Guaranty Program;
• The Section 504 Certified Development Company (CDC) Program; and
• The MicroLoan, a Section 7(m) Loan Program.

The different sections under which SBA loans may be obtained refer to sections of the Small Business Act.

Basic Section 7(a) Loan Guaranty Program

The Basic Section 7(a) Loan Guaranty Program serves as the SBA's primary business loan program to help qualified small businesses obtain financing when the business might not be eligible for business loans through normal lending channels. It is the SBA's most flexible business loan program. The customers for this program are start-up and existing small businesses.

Loans under the 7(a) Program are provided by lenders who are called participants because they "participate" with the SBA in this program. Most American banks participate in this program, although not all lenders do. Loans under the 7(a) program are only available on a guaranty basis, which means that the loans are provided by lenders who have decided to structure their own loans according to the SBA's requirements, and who apply to and receive from the SBA a guaranty on a portion of the loan. This is not a guaranty for the full amount of the loan; the lender and the SBA both share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default.

Under this concept of guaranty lending, commercial lenders make and administer the loans and the business applies to a lender, not the Government, for the loan. The lender decides if it will make the loan itself or if the application has some weaknesses, which will require an SBA guaranty if the loan is to be made. A borrower must have been turned down for and be unable to obtain a traditional loan. The guaranty on the loan is only available to the lender, not the borrowing business. The guaranty assures the lender that if the borrower does not repay the obligation, the Government will reimburse the lender up to the percentage of the SBA's guaranty. Nevertheless, the borrower remains obligated for the full amount due.

Loans under this program must meet certain criteria. The business gets a loan from its lender with a 7(a) structure, and the lender gets an SBA guaranty on a percentage or portion of the loan.

For more information go to www.sba.gov/financing/sbaloan/7a.htm.

Eligibility Criteria

In order to obtain a loan under any of the SBA Loan Programs, the applicant must first be eligible. Unless otherwise specifically stated, most of the SBA Loan Programs use the Basic Section 7(a) eligibility criteria. The eligibility requirements are broad and designed to accommodate the most diverse number of small business financing needs.

All businesses must meet the following eligibility criteria in order to be considered for financing under the SBA's 7(a) Loan Program:

• Size;
• Type of Business;
• Operate in the U.S. or its possessions;
• Availability of Funds from Other Sources;
• Use of Proceeds; and
• Repayment.

Size

The maximum size of an eligible business is defined by size standards developed by the SBA. Under the Small Business Act, an eligible small business is defined as one that is "independently owned and operated and not dominant in its field of operation." The Act includes some room for flexibility in the definition, taking into consideration differences in size from industry-to-industry. If a potential borrower is close to, but doesn't quite meet size standards, this can be discussed with the local SBA office.

Meeting the employment or sales standards developed by the SBA and based on the North American Industry Classification System (NAICS) is also an eligibility requirement. The following criteria are used by the SBA to determine if a business qualifies as a small business that is eligible for SBA loan assistance:

• Construction. Average (three years) annual sales or receipts of not more than $12 million to $28.5 million, depending upon the specific business type;· Manufacturing and Mining.
• Depending on the industry, approximately not more than 500 employees;
• Retail or Service. Depending on the industry, average (three year) annual sales or receipts of not more than $6 million up to $29 million;
• Wholesale. Not more than 100 employees.
• Special Trade Contractors. A limit of $7 million; and
• Agricultural Industries. A limit of $.5 million for most agricultural industries.

For more information about size criteria, go to www.sba.gov/size.

Type of Business

The business must be a for-profit enterprise and be an eligible type of business. Certain types of businesses and applicants require additional considerations regarding eligibility for SBA loan programs. Additionally, although the majority of businesses will be eligible for financial assistance from the SBA, some types of businesses are completely ineligible.

Business Types and Applicants with Additional Considerations

Additional considerations are required for the following business types and applicants:

• Aliens.
• Change of Ownership.
• Eligible Passive Company (EPC).
• Farms and Agricultural Businesses.
• Fishing Vessels.
• Franchises.
• Medical Facilities.
• Probation or Parole.
• Recreational Facilities and Clubs.

Ineligible Businesses

Specific types of ineligible businesses include:

• Charitable, Religious, or Other Non-Profit.
• Gambling Activities.
• Illegal Activities.
• Lending Activities.
• Other Speculative Activities.
• Pyramid Sales Plans.
• Real Estate Investment Firms.

For more information, go to www.sba.gov/financing/subfiles/type_of_business.html.

Use of Proceeds/Ineligible Use of Proceeds

The proceeds of a 7(a) loan may be used by a new or existing business to do the following:

• construct commercial buildings;
• expand or renovate facilities;
• finance receivables and supplement working capital;
• finance seasonal lines of credit;
• purchase machinery, equipment, fixtures and leasehold improvements;
• purchase land or buildings; or
• refinance existing debt, under some circumstances.

The proceeds of a 7(a) loan may not be used for the following purposes:

• For a non-sound business purpose;
• To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow;
• To make a partial change of ownership or change in the business that will not benefit the business;
• To refinance existing debt where the lender might sustain a loss and the SBA would cover the loss through refinancing; or
• To permit reimbursement of funds owed to any owner of the business.

Operate in the U.S. or its Possessions

The business must be engaged in or intend to do business in United States or its possessions.

Availability of Funds from Other Sources

The SBA Loan Program will not provide funds for businesses that are able to obtain or provide their own financing. Alternative resources for funding, if available, including personal assets, must be used first.

Repayment

The borrowing small business must demonstrate its ability to repay the loan.

Additional Components of the Basic Section 7(a) Loan Guaranty Program

Additional components of the Basic Section 7(a) Loan Guaranty Program are discussed below, including: maturity of the loans; negotiation of terms; maximum loan amount and guaranty; fees associated with SBA loans; interest rates; and prepayment penalties.

Maturity of Basic 7(a) Loans

Loan maturity under the Basic Section 7(a) Loan Program is based on several factors, including: the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. Loans for working capital typically will not exceed seven years, except where a longer maturity rate is required to accomplish repayment. The maximum maturity of loans to finance fixed assets other than real estate is limited to the economic life of those assets, but in no instance will that be longer than 25 years. A twenty-five year maximum generally applies to the acquisition of land and buildings, or the refinancing of debt incurred in their acquisition.

Negotiation of Terms

The negotiation of the specific terms of a 7(a) loan is a matter between the lending institution and the borrower, subject to the requirements of the SBA.

Maximum Loan Amount and Guaranty

The maximum amount of a loan available under the SBA's Basic 7(a) Program is $2 million, with the SBA's maximum exposure at $1.5 million. For example, if a business receives an SBA guaranteed loan in the amount of $2 million, the maximum guaranty to the lender is $1.5 million, or 75 percent. These amounts are subject to change.

Small loans have a maximum guaranty of 85 percent. A loan is considered small if the gross loan amount is $150,00 or less. For loans greater than $150,000, the maximum guaranty is 75 percent. The Export Working Capital Loan Program allows a maximum of a 90 percent guaranty, up to a guaranteed amount of $1.5 million.

For more information go to www.sba.gov/financing/sbaloan/7a.htm.

Fees Associated with SBA Loans

The SBA charges lenders a guaranty and a servicing fee for each loan approved. This is to offset the costs of the SBA Loan Programs to the taxpayers. Once these fees have been paid by the lender they may be passed to the borrower. The amount of these fees is determined by the amount of the loan guaranty.

For more information on fees, go to http://www.sba.gov/financing/subfiles/sba_7a_fees.html.

Certain fees typically associated with loans are prohibited from being charged to SBA Loan applicants, including processing fees, origination fees, application fees, points, brokerage fees, and bonus points. Under the Export Working Capital Loan Program, a commitment fee may be charged.

Interest Rates

Interest rates are negotiated between the borrower and the lender, subject to SBA maximums, which are pegged to the Prime Rate. The interest rate may be fixed or variable, and will be based upon the amount of the loan and the length of the loan.

For more information on interest rates for Section 7(a) Loans, go to http://www.sba.gov/financing/subfiles/7a_interest_rates.html.

Prepayment Penalties

A prepayment charge paid by the borrower to the SBA applies to those loans that meet the following criteria:

• A maturity of 15 years or more where the borrower is voluntarily prepaying;
• The prepayment amount exceeds 25 percent of the outstanding balance of the loan; and
• The prepayment is made with the first 3 years after the date of the first disbursement of the loan

The calculation for the prepayment fee is:

5% of the amount of the prepayment during the first year after disbursement;

3% of the amount of the prepayment during the second year after disbursement; or

1% of the amount of the prepayment during the third year after disbursement.

Special Section 7(a) Loan Guaranty Programs

The SBA also has programs for special needs under its 7(a) Loan Guaranty Program. In most cases, the guidelines for the Basic Program governs these programs, including the rules, regulations, interest rate, and fees.

The Special Programs include...