Magazine article The CPA Journal

Small Business Administration Business and Disaster Loans

Magazine article The CPA Journal

Small Business Administration Business and Disaster Loans

Article excerpt

The Small Business Act of 1953 created the Small Business Administration (SBA) to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." SBA-guaranteed loans are an excellent source of financial assistance for small companies. If the owner-manager of a small business represents an unacceptable credit risk for a private-sector lender such as a local commercial bank, the lender may apply for a SBA-guaranteed loan.

Rather than provide direct funding to small businesses, the SBA provides guarantees for major portions of loans made by SBA-qualified private-sector lenders (typically commercial banks, called lending partners) to small businesses. This arrangement is beneficial in a number of respects. First, the small business benefits by being able to obtain financing it could not receive otherwise. Second, the SBA does not have to lay out large amounts of cash. Finally, the bank can sell the guaranteed portion of the loan on the secondary market, providing liquidity while generating profits from the new customer base.

The SBA's four main business loan programs are

* 7(a) Loan Guaranty Program

* SBA Microloan Program

* 504 Certified Development Company Loan Program

* Small Business Investment Company (SBIC) Program.

The Exhibit summarizes the major SBA business and disaster loan programs.

7(a) Loan Guaranty Program

The SBA's primary financial assistance program is the 7(a) Loan Guaranty Program. Others include the SBA LowDoc Program, SBA Express, SBA Export Express, CAPLines Program, International Trade Loan Program, and Export Working Capital Loan Program. Information on these other programs is available at www.sba.gov.

Businesses can use 7(a) guaranty loans for most legitimate business purposes, such as the purchase of real estate to house business operations; construction, renovation, or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory; and working capital.

Loan and guaranty caps. The SBA guaranty can be obtained for small or large loans. The SBA can guaranty up to 85% percent of small loans (up to $150,000). The SBA can guaranty up to 75% percent of large loans (more than $150,000 and generally no more than $2 million), with the maximum guaranty generally not exceeding $1 million.

Interest rates and fees. Interest rates on SBA-guaranteed loans may be lower than conventional bank loans for comparable risks. Both variable and fixed interest rates are available, and most loans have variable interest rates that are pegged to either the lowest prime rate or the SBA optional peg rate. Variable rates are adjusted on a consistent basis (e.g., monthly, quarterly, or annually). Specific terms are negotiated between the lending partner and the small business. Maximum fixed interest rates are pegged to the prime lending rate. Fixed interest rates for loans of $50,000 or less may not exceed prime plus 2.25% for loans that mature in less than seven years or prime plus 2.75% for loans that mature in seven or more years. Higher maximum fixed interest rates apply to loans under $50,000.

The SBA charges the lender a one-time guaranty fee of 2% to 3.5%, depending on the size of the loan. In addition to the interest and guaranty fee, the SBA charges an ongoing annualized servicing fee of 50 basis points (0.5%) that is applied to the outstanding balance of the SBA's guaranteed portion of the loan. Both of these fees may be passed on to the borrower. In some cases, borrowers of loans processed after December 22, 2000, are subject to prepayment charges if they elect to prepay the loan. Certain other fees, such as origination fees, processing fees, and application fees, are not permitted on 7(a) loans.

On January 10, 2002, President Bush signed the Supplementary Terrorist Activity Relief: The Defense Appropriation Act, which reduces the ongoing fee charged to the lender on new 7(a) loans made to small businesses that were adversely affected by the September 11 terrorist attacks and their aftermath. …

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