Term loans from a bank or commercial lender for which the SBA guarantees up to 80% of the loan principal SBA financing programs vary based on borrower needs. SBA secured loans are offered by private lenders and guaranteed up to 80% by the SBA, which helps reduce lender risk and helps lenders provide financing that is otherwise unavailable on reasonable terms. Below is an outline of some popular SBA loan programs
7A Secured Loan Scheme
SBA’s primary business loan program is the 7A General Business Loan Guarantee Program. It is often used to start a business and to meet various short- and long-term needs of an existing business, such as equipment purchases, working capital, leasehold improvements, inventory or real estate purchases. These loans are typically secured for up to $750,000. The guarantee rate is 80% for loans of $100,000 or less and 75% for loans over $100,000. Guidelines for SBA secured loans are similar to those for standard bank loans. Additionally, your company must meet SBA standards for small business eligibility, which vary by industry. Interest rates on SBA secured loans are based on prime rates. While the SBA does not set interest rates because they are not lenders, it does set the amount of interest that lenders may charge SBA borrowers. If the loan term is seven years or more, the SBA allows lenders to charge 2.75% more than the prevailing prime rate. If the loan term is less than seven years, the surcharge may be as high as 2.25%.
You can use the following assets as collateral for an SBA secured loan:
- land and/or buildings
- machinery and/or equipment
- Real estate and/or chattel mortgage
- Warehouse receipts for marketable goods
- A personal endorsement from the guarantor (a friend who is able and willing to repay the loan if you are unable to repay the loan)
- accounts receivable
- saving account
- life insurance policy
- stocks and bonds
504 Local Development Corporation Program
The SBA 504 Loans program provides small businesses with long-term, fixed-rate financing to acquire real estate, machinery, or equipment. These loans are administered by the Certified Development Corporation (CDC) through commercial lenders. 504 loans are typically 50% funded by banks, 40% by CDC, and 10% by businesses. In exchange for this below-market fixed-rate financing, the SBA expects small businesses to create or retain jobs or meet certain public policy goals. Businesses that meet these policy goals are those whose expansion will benefit business district revitalization (egg, Enterprise District), minority businesses, or rural development.
Micro Loan Program
Established in 1992, the SBA’s Microloan Program provides working capital ranging from a few hundred dollars to $25,000 to businesses that purchase inventory, supplies, furniture, fixtures, machinery and/or equipment because they need an amount that cannot be applied to Traditional lenders are too small. Proceeds cannot be used to repay existing debt or purchase real estate. These loans are not guaranteed by the SBA, but are provided through intermediary lenders, such as nonprofits with lending experience.
Microloan programs are offered in 45 states through community-based nonprofits that qualify as SBA microloans lenders. These organizations receive long-term loans from the SBA and set up revolving funds that provide smaller, short-term loans to small businesses. According to the SBA, the average loan size in 1998 was nearly $10,000, with 37 percent going to minority businesses and 45 percent to women-owned companies, groups that have historically had the hardest access to traditional small business loans.
The SBA 7A Loans also facilitates other types of loans to help small business owners. Loans are available to help small businesses comply with federal air and water pollution regulations and occupational safety and health requirements. Other loans can offset problems caused by federal actions, such as highway or building construction or the closure of military bases. There are loan programs designed to mitigate the economic damage that small businesses suffer from energy or material shortages or temporary economic disruption.
SBA also offers the following programs:
State Business and Industrial Development Corporations (SBIDCs) are capitalized through the state government. They typically offer long-term loans (from 5 to 20 years) to expand a small business or purchase capital equipment. Lender requirements and interest rates vary by state. Some SBIDCs will invest their capital in very high-risk businesses, while others will seek minimal risk.
The CDC-504 loan provides fixed asset financing through a Certified Development Company (CDC). These nonprofit corporations are sponsored by private sector organizations or state and local governments to promote economic development. The 504 CDC loan program is designed to enable small businesses to create and retain jobs—the rule of thumb is that SBA provides one job for every $35,000.