U.S. Small Business Administration Guaranteed Loans

Related Terms: HUBZone Employment Contracting Program

The U.S. Small Business Administration (SBA) is a major source of financing for small businesses in the United States. The SBA's various loan programs have provided needed funding for thousands of small enterprises who were unable to secure loans from lending institutions on their own; indeed, businesses cannot solicit loans from the SBA unless they are unable to get funding independently.

Some of today's most successful businesses, including Intel, Apple, and Federal Express, were each given a much needed boost in their early days by SBA loans. This record of success, coupled with the trend toward small-business start-ups and entrepreneurship in America, has encouraged both the SBA and its lending partners to continue to expand its loan programs. The SBA has subsequently set new records in various loan guarantee categories since the mid-1990s. In fiscal year 2005 the SBA made or guaranteed $19 billion worth of loans to small businesses, the most in its history. Loans were provided to more than 80,000 small companies, 28,000 of them were start-ups.

TYPES OF SBA GUARANTEED LOANS

The SBA's 7(a) Loan Program is the most popular of the agency's programs (more than 88,000 of these loans totaling almost $14 billion were bestowed upon small businesses in fiscal year 2005). Under this program, the SBA does not actually make direct loans to small businesses. Instead, it assures the institution that is making the business loan—usually a bank—that it will make payment on the loan if the business defaults on it. Since the SBA is taking responsibility for the loan, it is usually the final arbiter of whether a loan application will be approved or not.

The 7(a) Loan Program was formed to meet the long-term financing needs of small businesses. The primary advantage of 7(a) loans is that business enterprises are able to repay the loan over a very long period of time. Ten-year maturities are available for loans for equipment and working capital (though seven-year terms are more commonplace), and loans for real estate and major equipment purchases can be paid back over as long as 25 years. The SBA can guarantee 75 percent of loans up to $750,000, and 80 percent of loans of less than $100,000. The interest rate of 7(a) loans does not exceed 2.75 over the prime lending rate.

The SBA maintains several individual loan programs under the 7(a) umbrella. These include CAPLines, LowDoc, SBAExpress, EWCP, DELTA, and an assortment of other lending initiatives targeted at specific sectors of the small business world.

CAPLines

Limited to $750,000, CAPLines loans are given to small businesses with short-term working capital needs. "Under CAPLines," notes the SBA, "there are five distinct short-term working capital loans: the Seasonal, Contract, Builder's, Standard Asset-Based, and Small Asset-Based lines. For the most part, the SBA regulations governing the 7(a) Program also govern this program."

LowDoc

The Low Documentation Loan (LowDoc) Program is a simplified version of the 7(a) loan for businesses with strong credit histories seeking less than $150,000. It combines a streamlined application process (for many loan requests, the application is only one page long) with the elimination of several bureaucratic steps to improve response time to requests. Any small business that posted average annual sales over the previous three years of $5 million or less and employs 100 or few individuals (including all owners, partners, and principals) is eligible to apply for a Low Documentation Loan. Since its inception, the LowDoc Program has proven enormously popular with small business owners and entrepreneurs.

SBAExpress

This relatively new pilot program is only available through selected lending institutions. It makes loans of up to $150,000 to qualified businesses.

EWCP

The Export Working Capital Program (EWCP) guarantees loans for qualified small businesses engaged in export transactions. It replaced another SBA program known as the Export Revolving Line of Credit Program. Most of the SBA regulations governing the 7(a) Program also govern this program. Loan maturities, however, may be for up to three years, with an option for annual renewals. EWCP loans can be extended for either single or multiple export sales.

DELTA

The Defense Loan and Technical Assistance (DELTA) Program was implemented to help ease the impact of national defense cuts on defense-dependent small businesses. According to the SBA, DELTA loans of up to $1.25 million must be used to retain jobs of defense workers, create new jobs in impacted communities, or to make operating changes with the aim of remaining in the "national technical and industrial base." While listed under the 7(a) umbrella of loan programs, DELTA actually uses the 504 CDC program as well, discussed further below.

MicroLoans

SBA MicroLoans are short-term loans of up to $35,000. In fiscal year 2005 the SBA provided $20 million worth of MicroLoans, disseminated through non-profit groups, these loans are intended for the purchase of machinery and other equipment, office furniture, inventory, supplies, and working capital. The typical MicroLoan size was $10,500 in 2005.

International Trade Loan (ITL)

The ITL provides long-term financing assistance to small businesses who are involved in international trade or who have been hurt by imports. Under this program, the SBA guarantees loans for up to $1.25 million for a combination of fixed-asset financing and working capital needs (though the working capital portion of the guarantee is limited to $750,000).

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