Prequalifying for an SBA Section 7(a) Loan
The Prequalification Loan Program uses intermediary organizations to help small businesses develop successful loan packages that will secure SBA business loans. The targets of this program are new and emerging businesses, veterans, low-income borrowers, disabled business owners, exporters, and rural and specialized industries.
The intermediary organizations work with the applicant businesses to make sure the business plan is complete, and that the application is eligible and has credit merit. Once the intermediary is satisfied as to the proceeding, it will submit the application to the SBA for expedited processing.
If the SBA determines that the applicant is eligible and has sufficient credit merit to support approval, it will issue a commitment letter on behalf of the applicant, which letter indicates the SBA's willingness to guaranty a loan made by a lender under specified terms and conditions. The intermediary organization helps the borrower locate a lender offering the best terms. The applicant then takes the letter and its application to a lender for a decision.
For a more detailed description of these intermediary organizations, see Finding an SBA Office and SBA Lenders Near You. For a list of intermediary organizations (Small Business Development Centers) in your area, go to www.sba.gov/sbdc/index.html. Other than the maximum loan amount, all other aspects of the Prequalification Program, i.e., interest rates, maturities, collateral policy and guaranty percentages, follow those of the standard 7(a) loan program.
Under the Prequalification Program, the maximum loan amount is $250,000, 75 percent of which will be guaranteed by the SBA, or 85 percent if the loan is less than $150,000.
SBA Section 504 Certified Development Company (CDC) Program Loans
The Certified Development Company (CDC), a 504 Loan Program, provides growing businesses with long-term, fixed-rate financing for specific major fixed assets, such as land and buildings. A typical 504 project consists of three elements: (1) a loan secured from a private-sector lender with a senior lien; (2) a loan secured from a CDC with a junior lien covering up to 40 percent of the total cost; and (3) a contribution of at least 10 percent equity from the borrower.
A CDC is a private, nonprofit corporation set up in a community to promote the community's economic development. The CDCs work both with private lenders and the SBA, covering from 40 to 50 percent of the project cost, with a contribution of at least 10 percent equity by the business participating in the program.
Maximum Debenture
The maximum amount of a loan available under the 504 Loan Program is $1 million, and up to $1.3 million in certain cases.
Eligibility Requirements for 504 Loans
To be eligible under the 504 Loan Program, a business must be operated for-profit and fall within SBA size standards.
A business qualifies as small under the 504 Loan Program if its tangible net worth does not exceed $7 million, and the average net income does not exceed $2.5 million after taxes for two prior years. Loans will not be made to businesses engaged in either investing in rental real estate or speculating in real estate.
Use of Proceeds for 504 Loans
The proceeds from 504 Loans must be used for fixed assets projects. These projects may include:
- Construction of new facilities, or modernizing, renovating, or converting existing facilities;
- Purchasing land and improvements;
- Purchasing long-term machinery and equipment.The proceeds may not be used for refinancing, working capital or inventory, or consolidating or repaying debt.
Loan Terms for 504 Loans
Maturity for the debentures may be 10 or 20 years. The interest rates on 504 Loans are fixed at the time of the debenture, and approximate the current market rate for five- and 10-year U.S. Treasury Issues, plus a small increment. Fees may be financed with the loan, and consist of about 3 percent of the debenture. Application for a 504 Loan is made directly to the SBA local intermediary lender.
There are approximately 270 CDCs nationwide, each covering a specific geographic area. Check the SBA local listings for a CDC in your area.
Collateral for 504 Loans
The assets being purchased with a 504 Loan are used as collateral. The principal owners of the business are also required to make a personal guaranty. For more information go to www.sba.gov/financing/sbaloan/cdc504.html.
The SBA Microloan Section 7(m) Program
Microloan Program provides very small loans to small businesses, startups, or newly established businesses. Under this Program, the SBA makes funds available to nonprofit community-based lenders (also called intermediaries) which then make loans to eligible borrowers.
The Microloan 7(m) Program provides short-term loans of up to a maximum of $35,000 to small businesses and not-for-profit child-care centers. The typical Microloan is about $10,500.
Eligibility Requirements for Microloans
Businesses that meet the size and type of business criteria for the 7(a) Loan Guaranty Program are also qualified to apply for a Microloan.
Most types of small for-profit businesses are eligible for this program. The form of the business, be it a corporation, partnership, or sole proprietorship, is not the determining factor. The size of the business is more of a factor. Nonprofit child-care centers, for example, are eligible to apply under this program.
Use of Proceeds for Microloans
The proceeds may be used for working capital or the purchase or inventory, supplies, furniture, fixtures, machinery, and/or equipment, but may not be used to pay existing debts or purchase real estate.
Loan Terms for Microloan
The maximum term for repayment of a Microloan is six years. The actual loan terms may vary, based on several factors, including the size of the loan, the planned use of the proceeds of the loan, the requirements of the intermediary lender, and the needs of the borrower.
The SBA does not guarantee these loans. Microloans are delivered through specially designated and locally-based intermediary lenders, and are available in selected locations in most states.
Because Microloans are direct loans from intermediary lenders, interest rates for these loans will be different (higher) than Section 7(m) loans. The interest rates tend to be a certain percentage over the intermediary's cost of borrowing the money from the SBA.
Collateral for Microloans
Although a Microloan is fairly small compared to other types of loans, nevertheless intermediary lenders may still require some sort of collateral in addition to the personal guaranty of the business owner. The collateral requirements will be set individually by each local intermediary lender. Loans are typically collateralized by inventory, contracts, equipment, or other property.
Credit Requirements for Microloans
Intermediary lenders set the credit requirements for borrowers under the Microloan Program. An applicant will be expected to have good character, a strong commitment to the business idea, along with a credit history providing reasonable assurance of the ability to repay. In addition, the applicant should have some management expertise or be willing to participate in training to strengthen his or her management skills.
Technical Assistance for Microloans
Intermediary lenders are nonprofit community-based organizations with experience in lending and technical experience. They not only provide loans, but also offer management and technical services for the borrowers. In fact, intermediary lenders are required to provide these services, and businesses applying for a Microloan may be required to avail themselves of them before any loan application will be approved.
Applying for a Microloan
The first step in applying for a Microloan is to contact the intermediary lender in your area. Contact your local SBA district office to find one, since this program is not available everywhere. The intermediary lender will provide its own information on applying for the loan.
To find an intermediary lender in your area, go to www.sba.gov/financing/microparticipants.html. For more information on Microloans, go to www.sba.gov/financing/sbaloan/microloans.html.
