Regular Guaranteed Loans include International Trade loans, Express Loans, Patriot Express Loans, Small and Rural Advantage Loans, and Community Express Loans.
This is SBA's most frequently used loan program. A guaranteed loan is one made by a commercial lending institution (usually a bank) to a small business customer. The SBA provides the bank with a guarantee that will pay the bank a portion of the unpaid balance on loans that are not paid in full by the customer.
Every bank has its own internal credit standard and policy for approval of its loans. The SBA's guarantee permits a bank to broaden its own criteria to accommodate additional lending because of the federally-backed assurances.
While the guaranty extends the range of credit available through commercial lenders, it will not cover unsubstantiated repayment, poor collateral or improperly documented requests.
Therefore, it is incumbent on the applicant to find out if the request has a chance and then work with the bank to submit all required documentation first, so that the bank may evaluate the proposal and make its decision.
Under this program, the bank analyzes the credit and makes one of three decisions: to approve it entirely by itself; to approve subject to an SBA guaranty; or to decline the loan. Should the second method be chosen, the bank will submit the application to SBA on behalf of both the borrower and itself.
Keep in mind that the applicant is the bank's customer and the bank is SBA's customer. The prospective borrower does not need to contact the SBA.
General Information
Under the guaranty program, the lender provides all of the money. The SBA can guarantee loans up to $2 million; the guarantee is 75% of a loan over $150,000 and 85% of a loan up to $150,000. A small business may have more than one SBA loan, but the SBA's share cannot exceed $2 million.
The SBA will charge a fee for guaranteeing the loan; fees will run from 2% on loans up to $150,000 to 3.5% on those over $750,000, but if the loan has a term of less than a year the fee may be as low as .25%. SBA does not provide grants to start or grow a business.
Terms of Loan
The bank and its client (small business) negotiate the terms within the parameters described in the following paragraphs.
Interest Rate
There are two rate structures available on SBA guaranteed loans: fixed and variable. Variable rate loans can be adjusted monthly, quarterly, semi-annually, annually, and float with the prime rate. Fixed-rate loans do not change during the life of the loan.
The maximum allowable rate for both types of loans is 2.75% over prime for loans of seven years and longer, and 2.25% over the prime rate for loans up to seven years. This prime rate is the minimum New York prime rate as published in The Wall Street Journal. Loans under $50,000 may have a higher rate.
Maturity
The length of a loan is determined by the use of the loan proceeds. Working capital loans are generally limited to seven years. Machinery and equipment loans are based on the life of the machinery and equipment, but not to exceed 10 years. Real estate loans have maximum maturity of 25 years. These are the maximum terms. The bank may request shorter terms.
Use of Proceeds
A business may borrow for anything on the balance sheet such as inventory, receivables, land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, accounts payable. Funds may be used to purchase a business. Generally funds may not be used to effect a change of ownership among family members. If part of the funds are to be used to pay debts owing to the participating bank, additional collateral may be required from the bank.
Collateral
Collateral are those assets which secure a loan in the event of a default. Collateral can consist of the following: land, buildings, machinery, equipment, furniture, fixtures, autos, trucks, inventory, accounts receivable, mortgages on fixed assets held personally, or an assignment of the interest in a contract for deed. SBA can take a second position, if necessary. The collateral offered should be reasonably adequate to secure the loan.
Equity
An applicant must have an adequate capital investment in its own business. Typically, a new applicant should inject 33% of the total funds needed to start a new business. For existing businesses, SBA uses the business ratios provided by Dun and Bradstreet and Robert Morris Associates. The SBA considers all credit factors before making a decision.
Repayment
SBA and the bank expect a loan to be paid out of the profits of the business. The bottom line of any credit decision is whether a business can repay the loan and other obligations from earnings. This is determined by analyzing all the facts presented in an application; primarily, management ability, equity invested, financial statements of owners, and detailed justification of projected earnings.
Small/Rural Lender Advantage
The Small/Rural Lender Advantage Initiative is part of SBA's 7(a) loan program and encourages smaller and or rural lenders to offer SBA loans by streamlining the agency's loan application and approval process.
The key features include:
- the maximum loan size of $350,000;
- an SBA guarantee of 85% is available for loans of $150,000 or less; 75% if the loan is larger; and
- the loan has a short, simplified application, a quick processing time, and fillable PDF application.
Only limited, key financial documents are required.
International Trade Loans
This program operates under the Guaranteed Loan Program and utilizes the same credit criteria and conditions. SBA may guarantee 90% to a maximum of $2 million for fixed asset acquisition and 85% to a maximum of $250,000 for working capital. No consolidation of existing debt or refinancing is allowed.
The applicant must establish that the loan proceeds significantly expand existing exports, develop new export markets or must show substantial adverse impact by imports.
SBAExpress
This program allows lenders to make credit decisions directly, without SBA input. Lenders also use all their own documents including the note, security agreement and mortgage. SBA Express provides a fast turnaround on credit decisions. SBA Express loans also contain a revolving feature with a seven-year term. SBA guaranties 50% of the loan, rather than the 75 to 85% under the normal 7(a) program.
SBAExpress interest rates can be higher than those allowed under the basic 7(a) program. Interest rates are determined by the market, but with this program the lender is allowed to charge a rate higher than the 2.25% and 2.75% over prime that is normally allowed. The loan limit under this program is $350,000. Lenders need to be approved by SBA for participation in the program. All other eligibility criteria remain the same.
SBA Community Express Loans provide a greater guaranty percentage if the lender agrees to provide technical assistance to the borrower for the term of the loan. SBA Export Express loans also allow a greater guaranty to the lender if the borrower is involved in exporting products or services.
SBA Express loans may be used as a revolver with a limit of seven years.
Patriot Express Loans
The Patriot Ex[press Loan Imitative is a new loan program for veterans and member of the military community wanting to establish or expand a small business.
The program is open to veterans, service-disabled veterans, active duty service members, participating in the Military Transition Assistance Program, Reservists, and National Guard Members, current spouses of any of the above, and the widowed spouse of a service member or veteran who died during service or of a service-connected disability.
Loans are available up to $500,000 and qualify for SBA's maximum guarantee of 85% for loans of $150,000 or less and 75% for loans over $150,000 and up to $500,000.
For loans above $350,000, lenders are required to take all available collateral.
Patriot Express loans can be used for most business purposes, including startup, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.
The loans generally offer 2.25 to 4.75% over prime, depending upon the size and maturity of the loan.
The program is slated to operate through December 31, 2010.