What are SBA Loan programs?
The most visible elements of the administration 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 are 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 by a small business. These programs are chosen because most bank programs, while having similar payments and rates, require borrowers to refinance every five years.
Types of Guaranteed Business Loans through banking institutions include:
- Loan Guarantee Program
- 504 Fixed Asset Financing Program
- Micro Loan Program
- Economic Development Program
- Business Development Program
- Loan Guarantee Program: The 7 Loan Guarantee Program are 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 purchasing land or construction. 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.
- Micro Loan Program: Available for up to $35,000 through non-profit, micro loan intermediaries, to small businesses considered un-bankable in the traditional banking industry. • Economic Development Program: SBA partners such as SCORE and the Small Business Development Centers (SCDC’s), operating in each state provide free and confidential counseling and low-cost training to small businesses
- 8 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 Loan Verification officers who visit the property), applicant’s repayment ability (determined by applicant’s credit worthiness 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 are then referred to the Federal Emergency Management Agency (FEMA) for grants.
Although SBA says it won’t decline a loan for lack of enough collateral, the agency is statutorily required to ask for whatever collateral is available including the damaged property a second home or real estate.
Businesses are also eligible for long-term, low-interest loans to recover from a nationally declared disaster. The means testing used by the SBA seems variable as a recovering business may be eligible for a smaller loan shortly after a disaster, but if the company has not substantially recovered within a short period of time and within the window in which Disaster Loans are still available for that area, the business may be granted a subsequent loan from the SBA for a greater amount. Similar to the homeowner’s loan program mentioned above, a small business owner must pledge all their personal assets and acquire a similar pledge from a spouse or partner in the ownership of any shared assets. If defaulted on the loan the souse or partner must surrender their value in the asset(s). 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 if that person has little or great net worth.
Once an SBA guaranteed bank loan is approved, the SBA may mail closing documents to the applicant for signature. Disbursements may include an initial unsecured amount of $10,000 and subsequent disbursements pending upon construction progress and continued insurance coverage. After final disbursement, the loan is transferred to the SBA’s Office of Capital Assets for management and servicing or collection in the case of default.
Disaster Relief Loans can take many months to be approved. Often forms that are submitted to the SBA must travel to multiple locations and all information provided to them must be verified before any funds are disbursed. This delay in funding can often result in damage to the businesses cash flow, credit and ability to maintain the level of revenue required to repay the loan. The SBA solely determines the amount of the loan they will approve for a business and the business will not be notified of the amount of the loan until one to two business days before the funds are received.
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. After taking possession of all personal assets, the SBA may not pursue the former owner for many years allowing the person to rebuild their personal assets then will renew collection proceedings through a contracted collection agency.