U.S. Small Business Administration Guaranteed Loans

Pollution Control Program

This program extends loans to small businesses engaged in the planning, design, or installation of pollution control facilities.

504 Loans

The Small Business Administration's other major loan program is the 504 CDC (Certified Development Companies) Program. CDCs are nonprofit corporations established to aid communities in their economic development efforts. The 504 CDC Program is designed to provide growing businesses with long-range, fixed-rate financing (up to $1 million for qualified applicants) for major expansion expenditures in the realm of fixed-asset projects. These include: real estate purchases and improvements, including existing buildings, grading, street improvements, parking lots and landscaping, and utilities; long-term machinery and equipment; renovation of existing facilities; and building construction. Monies from the 504 CDC Program cannot be used for refinancing, working capital or inventory, or consolidating or repaying debt.

The SBA describes the program thusly: "Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business being helped. The maximum SBA debenture generally is $750,000 (up to $1 million in some cases)'¦. The CDC's portfolio must create or retain one job from every $35,000 provided by the SBA."

Disaster Assistance Loans

Finally, the SBA offers these loans to businesses that have been victimized by various natural disasters (fires, floods, hurricanes, earthquakes, etc.). These loans, limited to $1.5 million and not available to firms that were insured for their losses, are available to businesses of any size that need to repair or replace facilities to "pre-disaster" condition. Economic Injury Disaster Loans are also made available to companies that suffered severe economic damage as a result of a given disaster. These loans, which are capped at $1.5 million, are meant to help businesses cover ordinary operating expenses "which would have been payable barring disaster," according to the SBA. It is worth noting that businesses can apply for either type of disaster loan assistance, but they can be awarded no more than a total of $1.5 million from the two programs unless they qualify as a major source of employment for the region in which they operate.

INTEREST RATES ON SBA LOANS

The interest rates on SBA-guaranteed loans are negotiated between the borrowing business and the lending institution, but they are subject to SBA-imposed rate ceilings, which are linked to the prime rate. Interest rates on SBA loans can be either fixed or variable.

According to the SBA, fixed rate loans are not allowed to exceed the prime rate plus 2.25 percent if the loan matures in less than seven years. If the maturity of the loan is seven years or more, however, the rate can be boosted to the prime rate plus 2.75 percent. For SBA loans totaling less than $25,000, the maximum interest rate cannot exceed the prime rate plus 4.25 percent for loans with a maturity of less than seven years (for loans that mature after seven years, the interest rate can be as much as the prime rate plus 4.75 percent). For SBA loans between $25,000 and $50,000, maximum rates are not permitted to exceed 3.25 percent (for loans that mature in less than seven years) and 3.75 percent (for loans with longer terms of maturity).

Variable rate loans, notes the SBA, may be pegged to either the SBA optional peg rate or the lowest prime rate (the optional peg rate is a weighed average of rates that the federal government pays for loans with maturities similar to the average SBA loan). Under variable rate loan plans, the lender and borrower negotiate the amount of the spread to be added to the base interest rate. Such agreements also provide for regular adjustment periods wherein the note rate can be changed as needed. Some agreements call for monthly adjustment periods, while others provide for quarterly, semiannual, or annual adjustments.

ELIGIBILITY ISSUES

The Small Business Administration defines businesses eligible for SBA loans as those that: operate for profit; are engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and use alternative financial resources (such as personal assets) first. In addition, to secure SBA assistance, a company must qualify as a "small business" under the terms of the Small Business Act. That legislation defined an eligible small business as one that is independently owned and operated and not dominant in its industry.

Since the passage of the Small Business Act, the SBA has developed size standards for every industry to gauge whether a company qualifies as a "small business" or not. Size standards are arranged by Standard Industrial Classification (SIC) code, but in general, the following guidelines apply for major industry groups:

• Manufacturing—A key criteria for manufacturing establishments is the size of their work force. Generally, 1,500 employees is the cut-off point for SBA consideration, but even establishments that have between 500 and 1,500 employees may not qualify as small businesses; in such instances the SBA bases its determination on a size standard for the specific industry in which the business under consideration operates.
• Wholesaling—Generally, wholesale establishments seeking SBA financial assistance should not have more than 100 employees.
• Retail and Service—Financial information is the key consideration here; ideally, retail and service industry businesses seeking SBA assistance should not have more than $3.5 million in annual receipts, although the requests of larger establishments are considered (depending on the industry). Establishments engaged in construction or agriculture industries are also evaluated on the basis of their financial reports.

The Small Business Administration also considers other factors in determining whether an establishment qualifies as a small business. For example, if a business is affiliated with another company, the owners must determine the primary business activity of both the affiliated group and the applicant business before submitting a request for SBA assistance. If the applicant business and the affiliated group do not both meet the SBA's size standards for their primary business activities, then the loan request will not be considered.

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