Basic Financing Topics

SBA’s Role in Providing Financial Assistance to America’s Small Businesses

The U.S. Small Business Administration (SBA) is an independent Agency of the Executive Branch of the Federal Government. It is charged with the responsibility of providing four primary areas of assistance to American Small Business. These are: Advocacy, Management, Procurement, and Financial Assistance. Financial Assistance is delivered primarily through SBA’s Investment programs, Business Loan Programs, Disaster Loan Programs, and Bonding for Contractors.

SBA’s Business Loan Programs SBA administers three separate, but equally important loan programs. SBA sets the guidelines for the loans while SBA’s partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's Loan guaranty requirements and practices can change however as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.

Federal appropriations are available to the SBA to provide guarantees on loans structured under the Agency's requirements. With a loan guaranty, the actual funds are provided by independent lenders who receive the full faith and credit backing of the Federal Government on a portion of the loan they make to small business.

The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.

In a variation of this concept, community development organizations can get the Government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business.

SBA’s Investment Programs In 1958 Congress created The Small Business Investment Company (SBIC) program. SBICs, licensed by the Small Business Administration, are privately owned and managed investment firms. They are participants in a vital partnership between government and the private sector economy. With their own capital and with funds borrowed at favorable rates through the Federal Government, SBICs provide venture capital to small independent businesses, both new and already established.

All SBICs are profit-motivated businesses. A major incentive for SBICs to invest in small businesses is the chance to share in the success of the small business if it grows and prospers.

SBA’s Bonding Programs The Surety Bond Guarantee (SBG) Program was developed to provide small and minority contractors with contracting opportunities for which they would not otherwise bid. The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels.

SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.

Financing Basics

While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed

financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

Before inquiring about financing, ask yourself the following:

Do you need more capital or can you manage existing cash flow more effectively? How do you define your need? Do you need money to expand or as a cushion against risk? How urgent is your need? You can obtain the best terms when you anticipate your needs rather

than looking for money under pressure. How great are your risks? All businessess carry risks, and the degree of risk will affect cost and

available financing alternatives. In what state of development is the business? Needs are most critical during transitional stages. For what purposes will the capital be used? Any lender will require that capital be requested for

very specific needs. What is the state of your industry? Depressed, stable, or growth conditions require different

approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

How strong is your management team? Management is the most important element assessed by money sources.

Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your for the start-up and growth of your business.

Not All Money Is the Same

There are two types of financing: equity and debt financing. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing.

If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.

Equity Financing

Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California's Silicon Valley is a well-known example of capitalist investing.

Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not

perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing.

You may contact these investors directly, although they typically make their investments through referrals. The SBA also licenses Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies (MSBIs), which offer equity financing. Apple Computer, Federal Express and Nike Shoes received financing from SBICs at critical stages of their growth.

Additional Reading Raising Money through Equity Investments - Inc. Magazine

Debt Financing

There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally.

In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity.

Estimating Costs

In order to determine how much seed money you will need, you must estimate the costs of your business for at least the first several months. Every business is different, and has its own specific cash needs at different stages of development, so there is no universal method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to launch your business venture.

To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs, and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.

The most effective way to calculate your startup costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. The following tool will assist you in performing that task: Startup Cost Estimate Calculator

Personal vs. Business

Starting up a business can be a tremendous strain on your personal finances. It can take six months or more before your new venture is profitable and can provide financial support for you and your family.

Before going into business it is always wise to get your finances in order.

Write a monthly household budget that accounts for your income and your household expenses. Be as conservative as possible, because it is vital to your success that you have the resources to maintain your household expenses while your business is growing. Any strain on your personal budget will put the financial success of your business at risk.

It is also a good idea to check your personal credit situation. Too often, entrepreneurs think that their business credit and personal credit are separate. A business' credit is built upon the owner's personal credit. Because you have not established a business credit history, lenders and suppliers will use your personal credit history to determine your terms of credit.

Your credit report determines how you will be perceived by potential lenders and suppliers. You should know what appears on your credit report because you may find errors that you will want to have corrected. To get a copy of your credit report, refer to one of the three major credit bureaus:

EquifaxExperianTrans Union

FEDERAL GRANT RESOURCES

The U.S. Small Business Administration does not offer grants to start or expand small businesses, although it does offer a wide variety of loan programs.(See http://www.sba.gov/financing for more information) While SBA does offer some grant programs, these are generally designed to expand and enhance organizations that provide small business management, technical, or financial assistance. These grants generally support non-profit organizations, intermediary lending institutions, and state and local governments. (See Federal and State Technology Partnership Program, Women's Business Center Program Announcementsand visit New Markets Venture Capital Program.)

13 CFR 143 Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments The Federal Commons - (Now points to Grants.gov) an Internet grants management portal serving the grantee organization community. SBA Women's Business Center Grants 2004 The Catalog of Federal Domestic Assistance Inter-Agency Electronic Grants Committee - IAEGC Grant Writing Tips - Afterschool.gov Department of Commerce's Federal Grants Page e-GRANTS, The Department of Education's (ED) portal site for electronic grants Department of Education's - CFO Grants and Contracts Information Department of Education's "School-to-Work Grants Resources Department of Health Resources and Services Administration (HRSA) - Grants and Contracts Department of Justice - Ten Grants Department of Labor (DOL) - Employment and Training Administration - Welfare-to-Work - Grants listing by State Department of Transportation - Federal Highway Admn - Universities and Grants Programs HRSA - Office of Rural Health Policy - Grants Department of Labor - Grant and Contract Information Department of Transportation (DOT) - Hazardous Materials Emergency Preparedness (HMEP) grant program DOT's State Highway Program Grants EPA's Grants Information Overview EPA's 2001 Environmental Research Grant Announcements EPA's Region IV Grants and Financial Assistance Housing and Urban Development (HUD) - Grants HUD - Funding Announcements National Cancer Institute - Research Projects Grants National Endowment for the Humanities - Grants and Applications GrantsNet - U.S. Department of Health and Human Services NIH - Grants and Funding Opportunities

Native American Programs - Grant Programs - Points of Contact National Oceanic and Atmospheric Administration (NOAA) - Business and Grants Opportunities NOAA Sponsored - National Sea Grant NOAA's National Marine Fisheries Service - Alaska Region - Grants Information National Park Service (NPS) - Grants and Tax Credits National Science Foundation (NSF) - Overview of Grants and Awards Office of Electronic Commerce - Grants Office of Naval Research - Grants, Contracts and Acquisition

Capital for Growth

An expanding business offers the potential for numerous growth opportunities. Employees benefit from business growth through increased earnings and promotions. Customers benefit from expanded products and services. Owners benefit through increased profit potential. Society benefits through the new jobs created. Managing this growth, although rewarding, can challenge your skills and financial resources.

Financial management involves all the activities that enable a company to obtain capital for growth, allocate resources efficiently, maximize the income potential of the business activity and monitor results through accounting documents. Such management requires a well-written, comprehensive financial management plan clearly outlining the assets, debts and the current and future profit potential of your business.

Successfully managing financial resources is important in new and expanding businesses, so take time to develop and implement a financial plan that will ensure the success of your business.   Learn more about this topic.

Financial Management for the Growing Business

Equity Financing

Most small or growth-stage businesses use equity financing in a limited way.  As with debt financing, most of the time additional equity comes from non-professional investors such as friends, relatives, employees, customers or industry colleagues.

However, the most common source of professional equity funding is that group of investors known as venture capitalists.  Venture capitalists are institutional risk takers and may be groups of wealthy individuals, government-assisted sources or major financial institutions.  Most specialize in one or a few closely related industries.  The high tech industry of California's Silicon Valley offers many shining examples of capitalist investing.

While public perception of venture capitalists may be of deep-pocketed financial gurus looking for "that hot new business" in which to invest their money, in reality they most often prefer three-to-five-year old companies that offer the potential to become major regional or national concerns and return higher-than-average profits to their shareholders.

Venture capitalists may scrutinize thousands of potential investments annually, while investing ultimately in only a handful.

Learn more about SBA.s equity capital programs.

Small Business Investment Companies

http://www.sba.gov/INV/

New Markets Venture Capital Program

http://www.sba.gov/INV/NMVC/index.html

Financial Statements

Understanding financial statements is critically important to the success of a small business. 

Financial statements can be used as a roadmap on your business journey to economic success. Using numbers as navigation aids can steer you in the right direction and help you avoid costly breakdowns. Most business owners don't realize that financial statements have a value that goes far beyond their use to prepare tax returns or loan applications.

Review the attached, easy to follow guide to help you better understand financial statements.   

Understanding Financial Statements

The primary financial statements are represented in the balance sheet and income statement. Learn more about these statements:

Balance Sheet Income Statement

Prepare a balance sheet, income statement and/or cash flow statement for your business. Use SBA's Template Forms to build your own financial statements.

By visiting the SBA website you can click on the links to review information concerning Financial Statements. However, a great compliment to this section of the Financing piece of starting a business would be my notes on Accounting.

Eligibility & Preparation

CREDIT FACTORS

CREDIT FACTORS A POTENTIAL BORROWER SHOULD KNOW

To determine if you qualify for SBA's financial assistance, you should first understand some basic credit factors that apply to all loan requests. Every application needs positive credit merits to be approved. These are the same credit factors a lender will review and analyze before deciding whether to internally approve your loan application, seek a guaranty from SBA to support their loan to you, or decline your application all together.

1. EQUITY INVESTMENT

Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. There will be a careful examination of the debt-to- worth ratio of the applicant to understand how much money the lender is being asked to lend (debt) in relation to how much the owner(s) have invested (worth). Owners invest either assets that are applicable to the operation of the business and/or cash which can be used to acquire such assets. The value of invested assets should be substantiated by invoices or appraisals for start-up businesses, or current financial statements for existing businesses.

Strong equity with a manageable debt level provide financial resiliency to help a firm weather periods of operational adversity. Minimal or non-existent equity makes a business susceptible to miscalculation and thereby increases the risk of default on -- failing to repay -- borrowed funds. Strong equity ensures the owner(s) remains committed to the business. Sufficient equity is particularly important for new business. Weak equity makes a lender more hesitant to provide any financial assistance. However, low (not non- existent) equity in relation to existing and projected debt -- the loan -- can be overcome with a strong showing in all the other credit factors.

Determining whether a company's level of debt is appropriate in relation to its equity requires analysis of the company's expected earnings and the viability and variability of these earnings. The stronger the support for projected profits, the greater the likelihood the loan will be approved. Applications with high debt, low equity, and unsupported projections are prime candidates for loan denial.

2. EARNINGS REQUIREMENTS

Financial obligations are paid with cash, not profits. When cash outflow exceeds cash inflow for an extended period of time, a business cannot continue to operate. As a result, cash management is extremely important. In order to adequately support a company's operation, cash must be at the right place, at the right time and in the right amount.

A company must be able to meet all its debt payments, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection,broken down on a monthly basis, and covering the first annual period after the loan is received.

When the projections are for either a new business or an existing business with a significant (20% plus) difference in performance, the applicant should write down all assumptions which went into the estimations of both revenues and expenses and provide these assumptions as part of the application.

All SBA loans must be able to reasonably demonstrate the "ability to repay" the intended obligation from the business operation. For an existing business wanting to buy a building where the mortgage payment will not exceed historical rent, the process is relatively easy. In this case, the funds used to pay the rent can now be used to pay the mortgage. However, for a new or expanding business withanticipated revenues and expenses exceeding past performance, the necessity for the lender to understand all the assumptions on how these revenues will be generated is paramount to loan approval.

3. WORKING CAPITAL

Working capital is defined as the excess of current assets over current liabilities.

Current assets are the most liquid and most easily convertible to cash, of all assets. Current liabilities are obligations due within one year. Therefore, working capital measures what is available to pay a company's current debts. It also represents the cushion or margin of protection a company can give their short term creditors.

Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm's ability to meet its trade and short-term debt obligations, as well as to remain

financially viable.

4. COLLATERAL

To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans. However, SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.

Collateral can consist of both assets which are usable in the business and personal assets which remain outside the business. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan. Depending upon how much equity was contributed towards the acquisition ofthese assets, the lender also is likely to require other business assets as collateral.

For all SBA loans, personal guarantees are required of every 20 percent or greater owner, plus others individuals who hold key management positions. Whether or not a guarantee will be secured by personal assets is based on the value of the assets already pledged and the value of the assetspersonally owned compared to the amount borrowed. In the event real estate is to be used as collateral, borrowers should be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate related transactions of $50,000 or more.

Certified appraisals are required for loans of $100,000 or more. SBA may require professional appraisals of both business and personal assets, plus any necessary survey, and/or feasibility study.

Owner-occupied residences generally become collateral when:

1) The lender requires the residence as collateral;

2) The equity in the residence is substantial and other credit factors are weak;

3) Such collateral is necessary to assure that the principal(s) remain committed to the success of theventure for which the loan is being made;

4) The applicant operates the business out of the residence or other buildings located on the same parcel of land.

5. RESOURCE MANAGEMENT

The ability of individuals to manage the resources of their business, sometimes referred to as "character," is a prime consideration when determining whether or not a loan will be made. Managerial capacity is an important factor involving education, experience and motivation. A proven positiveability to manage resources is also a large consideration.

Mathematical calculations on the historical and projected financial statements form ratios which provide insight into how resources have been managed in the past. It is important to understand that no single ratio provides all this insight, but the use of several ratios in conjunction with one another can provides an overall picture of management performance. Some key ratios all lenders review are: debt to worth, working capital, the rate at which income is received after it is earned, the rate at which debt is paid after becoming due, and the rate at which the service or product moves from the business to the customer.

Basic Requirements

What Will I Need to be Considered for SBA Loan Assistance?

Even though the SBA-qualifying standards are more flexible than other types of loans, lenders will generally ask for certain information before deciding to use an SBA loan program. Generally, a business

will need the following documentation to evaluate your loan request:

• Business profile. A document describing type of business, annual sales, number of employees, length of time in business and ownership.

• Loan request. A description of how loan funds will be used. Should include purpose, amount and type of loan.

• Collateral. Description of collateral offered to secure the loan, including equity in the business, borrowed funds and available cash.

• Business financial statements. Complete financial statements for the past three years and current interim financial statements.

• Personal financial statements. Statements of owners, partners, officers and stockholders owning 20% or more of the business.

The strength and accuracy of your financial statements will be the primary basis for the lending decision, so be sure that yours are carefully prepared and up-to-date.

• The most important documents in your financial statements are:

• Balance sheets from the last three fiscal year-ends.

• Income statements revealing your business profits or losses for the last three years.

• Cash flow projections indicating how much cash you expect to generate to repay the loan.

• Accounts receivable and “payable aging,” breaking your receivables and payables in to 30-, 60-, 90- and past 90-day old categories.

• Personal financial statements from you and your business partners listing all personal assets, liabilities and monthly payments, as well as your personal tax returns for the past three years.

Size Eligibility

What Will I Need to be Considered for SBA Loan Assistance?

SBA defines a small business as one that is independently owned and operated and not dominant in its field. A small business must also meet the employment or sales standards developed by the SmallBusiness Administration and based on the North American Industry Classification System (NAICS). In general, the following criteria are used by SBA to determine if a concern qualifies as a small business and is eligible for SBA loan assistance: 

WHOLESALE - not more than 100 employees;

RETAIL or SERVICE - Average (3 year) annual sales or receipts of not more than $6.0 million to $29.0 million, depending on business type;

MANUFACTURING - Generally not more than 500 employees, but in some cases up to 1,500 employees;

CONSTRUCTION - Average (3 year) annual sales or receipts of not more than $12.0 million to $28.5 million, depending on the specific business type.

Applying for a Loan

When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan proposal and application; you may not get a second opportunity.

Always begin your proposal with a cover letter or executive summary. Clearly and briefly explain who you are, your business background, the nature of your business, the amount and purpose of your loan request, your requested terms of repayment, how the funds will benefit your business, and how you will repay the loan. Keep this cover page simple and direct.

Many different loan proposal formats are possible. You may want to contact your commercial lender to determine which format is best for you. When writing your proposal, don't assume the reader is familiar with your industry or your individual business. Always include industry-specific details so your reader can understand how your particular business is run and what industry trends affect it.

Description of Business:

Provide a written description of your business, including the following information:

Type of organization Date of information Location Product or service Brief history Proposed Future Operation Competition Customers

Suppliers

Management Experience: Resumes of each owner and key management members.

Personal Financial Statements: SBA requires financial statements for all principal owners (20% or more) and guarantors. Financial statements should not be older than 90 days. Make certain that you attach a copy of last year's federal income tax return to the financial statement.

Loan Repayment: Provide a brief written statement indicating how the loan will be repaid, including repayment sources and time requirements. Cash-flow schedules, budgets, and other appropriate information should support this statement. Existing Business: Provide financial statements for at least the last three years, plus a current dated statement (no older than 90 days) including balance sheets, profit & loss statements, and a reconciliation of net worth. Aging of accounts payable and accounts receivables should be included, as well as a schedule of term debt. Other balance sheet items of significant value contained in the most recent statement should be explained.

Proposed Business: Provide a pro-forma balance sheet reflecting sources and uses of both equity and borrowed funds.

Projections: Provide a projection of future operations for at least one year or until positive cash flow can be shown. Include earnings, expenses, and reasoning for these estimates. The projections should be in profit & loss format. Explain assumptions used if different from trend or industry standards and support your projected figures with clear, documentable explanations.

Other Items As They Apply:

Lease (copies of proposal)Franchise AgreementPurchase AgreementArticles of Incorporation

Plans, SpecificationsCopies of LicensesLetters of ReferenceLetters of IntentContractsPartnership Agreement

Collateral: List real property and other assets to be held as collateral. Few financial institutions will provide non-collateral based loans. All loans should have at least two identifiable sources of repayment. The first source is ordinarily cash flow generated from profitable operations of the business. The second source is usually collateral pledged to secure the loan.

The 5 C's of Credit

Your bank is in business to make money. Consequently, when a bank lends money it wants to ensure that it will be paid back. The bank must consider the 5 "C's" of Credit each time it makes a loan.

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the personal impression you make on the potential lender or investor. The lender decide subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

Borrowing Money

Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy.  Before you approach your banker for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they consider making you a loan. This discussion outlines some of the key factors a bank uses to analyze a potential borrower. Also included is a self-assessment checklist at the end of this section for you to complete. 

KEY POINTS TO CONSIDER

Let's begin by exploring some of the key points your banker will review:

1. Ability to Repay/CapacityThe ability to repay must be justified in your loan package. Banks want to see two sources of repayment -- cashflow from the business, plus a secondary source such as collateral. In order to analyze the cash flow of the business, the lender will review the business's past financial statements. Generally, banks feel most comfortable dealing with a business that has been in existence for a number of years because they have a financial track record. If the business has consistently made a profit and that profit can cover the payment of additional debt, then it is likely that the loan will be approved. If however, the business has been operating marginally and now has a new opportunity to grow or if that business is a start-up, then it is necessary to prepare a thorough loan package with detailed explanation addressing how the business will be able to repay the loan.

2. Credit HistoryOne of the first things a bank will determine when a person/business requests a loan is whether their personal and business credit is good. Therefore before you go to the bank, or even start the process of preparing a loan request, you want to make sure your credit is good.

First get your personal credit report. You can obtain a report by calling TransUnion, Equifax, TRW or another credit bureau. It is important that you initiate this step well in advance of seeking a loan. Personal credit reports may contain errors or be out of date. In many cases, people find that they paid off a bill but that it has not been recorded on their credit report. It can take 3 to 4 weeks for this error to be corrected -- and it is up to you to see that this happens. You want to make sure that when the bank pulls your credit report that all the errors have been corrected and your history is up to date.

Once you obtain your credit report, how do you know what it says? Many people receive their credit reports yet have no idea what the strange numbers signify. The following should help in interpreting and checking your personal credit report.

First, check your name, social security number and address at the top of the page. Make sure these are correct. There are people who have found that they have credit information from another person because of mistakes in their identification information.

On the rest of your credit report you will see a list of all the credit you have obtained in the past - credit cards, mortgages, student loans, etc. Each credit will be listed individually with information on how you paid that credit. Any credit where you have had a problem in paying will be listed towards the top of the list. These are the credits that my affect your ability to obtain a loan.

If you have been late by a month on an occasional payment, this probably will not adversely affect your credit. However, if you are continuously late in paying your credit, have a credit that was never paid and charged off, have a judgment against you, or have declared bankruptcy in the last 7 years, it is likely that you will have difficulty in obtaining a loan.

In some cases, a person has had a period of bad credit based on a divorce, medical crisis, or some other significant event. If you can show that your credit was good before and after this event and that you have tried to pay back those debts incurred in the period of bad credit, you should be able to obtain a loan. It is best if you write an explanation of your credit problems and how you have rectified them and attach this to your credit report in your loan package.

Each credit bureau has a slightly different way of presenting your credit information. You can get specific information on "how to read the report" form the appropriate company, but here's a few tips to get you started:

TRWIn the last few years TRW has prepared credit reports with words and not numbers. Good credits should read "Never Late", "Paid as Agreed". Poor credits will read as

TransUnionOn the right side of the page on the credit report are number and letter combinations. "I" means installment credit. "R" means revolving credit. The key information is in the numbers. A "1" means perfect credit since you have always paid your bills on time. "2" or "3" means you have been 2 to 3 months late in paying your bills. Too

many of theses will hurt your chances in obtaining credit. A "9" means delinquency in paying your bills and a charge off. This could make it difficult in obtaining a loan.

If you need assistance in interpreting or evaluating your credit report you can ask your accountant or a friendly banker. If your credit report has a few problems on it, you may find that another bank may evaluate your credit report differently.

3. EquityFinancial institutions want to see a certain amount of equity in a business. Equity can be built up in a business through retained earnings or the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than 4 times the amount of equity. (Or stated differently, when you divide total liabilities by equity, your answer should not be more than 4.) Therefore if you want a loan you must ensure that there is enough equity in the company to leverage that loan.

Don't be misled into thinking that start-up businesses can obtain 100% financing through conventional or special loan programs. A business owner usually must put some of her/his own money into the business. The amount an individual must put into the business in order to obtain a loan is dependent on the type of loan, purpose and terms. For example, most banks want the owner to put in at least 20 - 40% of the total request.

Example: A new business needs a $100,000 to start. The business owner must put $20,000 of her own money into the new business as equity. Her loan will be $80,000. The debt to equity ratio is 4:1. Note also that this is only one of many factors used to evaluate the business -- just having the right debt/equity ratio does not guarantee you'll get the loan.

The balance sheet indicates the amount of equity or net worth of a business. The net worth of the business is often a combination of retained earnings and owner's equity. In many cases, owner's equity will be shown as a loan from shareholders and therefore a liability. If a business owner wishes to obtain a loan, she will be obligated to pay the bank back first and not herself. Consequently, it may be necessary to restructure the liability so that it becomes owner's equity or subordinate the loan. If the current debt to net worth is 4 or over it is unlikely that the business will be able to obtain additional debt/loan. For more information on understanding your balance sheet, check out Understanding Financial Statements.

4. CollateralFinancial institutions are looking for a second source of repayment, which often is collateral. Collateral are those personal and business assets that can be sold to pay back the loan. Every loan program, even many microloan programs, requires at least some collateral to secure a loan. If a potential borrower has no collateral to secure a loan, she/he will need a co-signer that has collateral to pledge. Otherwise it may be difficult to obtain a loan.

The value of collateral is not based on the market value. It is discounted to take into account the value that would be lost if the assets had to be liquidated.

The following table gives a general approximation on how different forms of collateral are valued by a typical bank and the SBA:

COLLATERAL TYPE BANK SBA

HOUSE: Market Value x .75- Mortgage balance

Market Value x .80- Mortgage balance

CAR: nothing nothing

TRUCK & HEAVY EQUIPMENT:

Depreciated Value x .50same

OFFICE EQUIPMENT: nothing nothing

FURNITURE & FIXTURES:Depreciated Value x .50 same

INVENTORY:  Perishables

nothing nothing

JEWELLERY nothing nothing

OTHER 10%-50% 10%-50%

RECEIVABLES Under 90 days x .75 Under 90 days x .50

STOCKS & BONDS 50%-90% 50%-90%

MUTUAL FUNDS nothing nothing

IRA nothing nothing

CD 100% 100%

COLLATERAL COVERAGE RATIOThe bank will calculate your collateral coverage ratio as part of the loan evaluation process. This is calculated as follows:

Total Discounted Collateral ValueTotal Loan Request

5. ExperienceA client that wants to open a business and has no experience in that business should not seek financing let alone start the business unless they intend to hire people who know the business or take on a partner that has the appropriate experience. Regardless, the client should be advised to take some time to work in the business first and take some entrepreneurial training classes.

QUESTIONS YOUR BANKER WILL ASK

The key questions the banker will be seeking to answer are as follows:

1. Can the business repay the loan? (is cash flow greater than debt service?) 2. Can you repay the loan if the business fails? (is collateral sufficient to repay the loan?) 3. Does the business collect its bills? 4. Does the business control its inventory? 5. Does the business pay its bills? 6. Are the officers committed to the business? 7. Does the business have a profitable operating history? 8. Does the business match its sources and uses of funds? 9. Are sales growing? 10. Does the business control expenses? 11. Are profits increasing as a percentage of sales? 12. Is there any discretionary cash flow? 13. What is the future of the industry? 14. Who is your competition and what are their strengths and weaknesses?.

SELF-ASSESSMENT CHECKLIST

Whether you are applying for a microloan, SBA loan or a traditional bank loan, there are certain factors that improve your ability to obtain financing. The following is a simple checklist to do before you begin to seek capital.

Do you have a good personal credit history?Yes No

Research indicates that good personal credit history is one of the most important factors in identifying borrowers that will repay their commercial loans. Many loan programs require perfect personal credit in order to qualify. For

further information refer to Key Points to Consider - Credit History.

Have you filed all income tax returns?Yes No

Lenders and government loan programs alike want to see that an individual has met their tax obligations for both filing and paying taxes. For SBA loans tax verification is obtained from the IRS before a loan is closed.

Are your Income Taxes paid?Yes No

Many of the loan programs are in partnership with government agencies. These loan programs do not look favorably on individuals who have unpaid income taxes.

Does the business have the ability to repay a loan?Yes No

(For existing businesses) If the business is profitable, then there are demonstrated profits to repay some amount of new debt. If a business is not profitable, then it becomes very important to prove how it will be profitable in the near future so that a loan can be repaid.

(For start-up businesses) It is very important that you find as many data on comparable businesses or industry statistics in order to "prove' the revenues you intend to generate and the expenses you anticipate incurring.

Does your business have a positive net worth?Yes No

(For existing businesses) The net worth of the business should be positive. If there are loans from shareholders on the balance sheet and you are able to subordinate these (not pay the shareholders) while you pay the bank loan back, you may consider these loans from shareholders as equity.

Is your business not carrying too much debt?Yes No

(For existing businesses) Businesses that have too much debt will find that their profits are directed at paying back loans and not building retained earnings in the business that can fund future growth. Consequently, banks and government loan programs look more favorably at loan requests that do not add too much debt to the business. Banks often look for a debt to net worth ratio of 4 or less (total liabilities divided by equity).

Do you have enough of your own money in the business?Yes No

(For start-up businesses) All loan programs require that the business owner put their own money in the business. This owner equity injection shows that the owner believes in the business enough to risk their own money. Some microloan programs require only 10% owner equity, other programs require at least 30% and will look more favorably on a loan request the more equity is in the business.

Do you have collateral to secure a business loan?Yes No

Business and personal assets can be considered collateral, or a way to repay the loan if the business defaults on a loan. Most collateral is valued at an amount less than face value based on a variety of factors.

Are you willing to personally guarantee a loan?Yes No

Most business owners are asked for a personal guarantee in order to obtain their first business loans.

Does your business have qualified managers and advisors?Yes No

(For existing businesses) As businesses expand, they need more sophisticated management as it relates to strategic planning. marketing, recordkeeping, inventory control, personnel, etc. When you apply for a loan, your banker will consider the qualifications of your management team and advisors in order to determine if they are capable of leading your business to the next level of growth.

If there are sectors of your business that you need assistance with, we strongly recommend that you attend entrepreneurial training classes, visit a women's business assistance center or Small Business Development Center in your area, or contact your regional SBA office for information on local resources.

Do you have experience in running your own business?Yes No

(For start-up businesses) For a new business especially, it is important for the business owner to demonstrate that she has experience in the industry and/or entrepreneurial experience. If you have never owned or operated a small business before, we strongly recommend that you attend entrepreneurial training classes.

STOP! If you cannot answer yes to all the questions above, then you may have difficulties obtaining financing at this time. We suggest that you evaluate the needs of your business and take advantage of local business assistance centers.

Prequalification Program

The Prequalification Loan program uses intermediary organizations to assist prospective borrowers in developing viable loan application packages and securing loans. This program targets low income borrowers, disabled business owners, new and emerging businesses, veterans, exporters, rural and specialized industries.

The job of the intermediary is to work with the applicant to make sure the business plan is complete and that the application is both eligible and has credit merit. If the intermediary is satisfied that the application has a chance for approval, it will send it to the SBA for processing. To find out whether there is a pre-qualification intermediary operating in your area, contact your local SBA office. Note: Small Business Development Centers serving as intermediaries do not charge a fee for loan packaging. For-profit organizations will charge a fee.

Once the loan package is assembled, it is submitted to the SBA for expedited consideration. SBA conducts a thorough analysis of the case, using the same time frame and degree of analysis that it uses when processing requests under the regular method of delivery process.

If SBA decides the application is eligible and has sufficient credit merit to warrant approval, it will issue a commitment letter on behalf of the applicant. The commitment letter or pre-qualification letter, indicates SBA's willingness to guaranty a loan made by a lender under certain terms and conditions. The intermediary then helps the borrower locate a lender offering the most competitive rates. The applicant then takes the letter and its application documents to a lender for a decision.

Policies Specific to the Prequalification ProgramThe maximum loan amount for this pilot program is $250,000. Interest Rates, Maturities, Collateral policy, and Guaranty percentages all follow the standard 7(a) loan program.

You can check out the Finance section at the SBA website to obtain forms!

SBA Loan Programs

Snap Shot

The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.

PROGRAM: Basic 7(a) Loan Guaranty

FUNCTION: Serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general

business purposes.  

Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. 

CUSTOMER: Start-up and existing small businesses, commercial lending institutions

DELIVERED THROUGH: Commercial lending institutions

www.sba.gov/financing/sbaloan/7a.htm 

SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs.

 PROGRAM: Certified Development Company (CDC), a 504 Loan Program

FUNCTION: Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases).  

CUSTOMER: Small businesses requiring “brick and mortar” financing

DELIVERED THROUGH: Certified development companies (private, nonprofit

corporations set up to contribute to the economic development of their communities or regions)

www.sba.gov/financing/sbaloan/cdc504.htm 

PROGRAM: Microloan, a 7(m) Loan Program

FUNCTION: Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the

SBA. The microloan program is available in selected locations in most states.  

CUSTOMER: Small businesses and not-for-profit child-care centers needing small-scale financing and technical assistance for start-up or expansion

DELIVERED THROUGH: Specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance)

www.sba.gov/financing/sbaloan/microloans.htm 

PROGRAM: Loan Prequalification

FUNCTION: Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicant’s character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBA’s Office of Field Operations and SBA district offices. 

CUSTOMER: Designated small businesses

DELIVERED THROUGH: Intermediaries operating in specific geographic areas.

www.sba.gov/financing/sbaloan/prequalification.htm

Basic 7(a) Loan Program

7(a) loans are the most basic and most used type loan of SBA's business loan programs. Its name comes from section 7(a) of the Small Business Act, which authorizes the Agency to provide business loans to American small businesses.

All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate with SBA in the 7(a) program which expands the availability of lenders making loans under SBA guidelines.

7(a) loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is a guaranty against payment default. It does not cover imprudent decisions by the lender or misrepresentation by the borrower.

Under the guaranty concept, commercial lenders make and administer the loans. The business applies to a lender for their financing. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty which SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for its loss, up to the percentage of SBA's guaranty. Under this program, the

borrower remains obligated for the full amount due.

All 7(a) loans which SBA guaranty must meet 7(a) criteria. The business gets a loan from its lender with a 7(a) structure and the lender gets an SBA guaranty on a portion or percentage of this loan. Hence the primary business loan assistance program available to small business from the SBA is called the 7(a) guaranty loan program.

A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the Government. If the lender is not willing to provide the loan, even if they may be able to get an SBA guaranty, the Agency can not force the lender to change their mind. Neither can SBA make the loan by itself because the Agency does not have any money to lend. Therefore it is paramount that all applicants positively approach the lender for a loan, and that they know the lenders criteria and requirements as well as those of the SBA. In order to obtain positive consideration for an SBA supported loan, the applicant must be both eligible and creditworthy.

WHAT SBA SEEKS IN A LOAN APPLICATION

In order to get a 7(a) loan, the applicant must first be eligible. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.

ELIGIBILITY CRITERIA

All applicants must be eligible to be considered for a 7(a) loan. The eligibility requirements are designed to be as broad as possible in order that this lending program can accommodate the most diverse variety of small business financing needs. All businesses that are considered for financing under SBA’s 7(a) loan program must: meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Certain variations of SBA’s 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria

Eligibility factors for all 7(a) loans include: size, type of business, use of proceeds, and the availability of funds from other sources. The following links will provide more detailed information on these eligibility issues.

SIZEELIGIBLE AND INELIGIBLE TYPES OF BUSINESSUSE OF PROCEEDSAVAILABILITY OF FUNDS FROM OTHER SOURCES:

CHARACTER CONSIDERATIONS:

SBA must determine if the principals of each applicant firm have historically shown the willingness and ability to pay their debts and whether they abided by the laws of their community. The Agency must know if there are any factors which impact on these issues. Therefore, a "Statement of Personal History" is obtained from each principal.

OTHER ASPECTS OF THE BASIC 7(a) LOAN PROGRAM

In addition to credit and eligibility criteria, an applicant should be aware of the general types of terms and conditions they can expect if SBA is involved in the financial assistance. The specific terms of SBA loans are negotiated between an applicant and the participating financial institution, subject to the requirements of SBA. In general, the following provisions apply to all SBA 7(a) loans. However, certain Loan Programs or Lender Programs vary from these standards. These variations are indicated for each program.

Maximum Loan AmountsMaturity Terms For 7(A) LoansInterest Rates Applicable to 7(A) LoansPercentage of Guaranty on 7(A) LoansSBA Fees for 7(A) LoansPrepayment Penalties for SBA 7(A) Loans

Home and Personal Property Disaster Loans

The Facts About...Disaster Assistance Loans for Homes & Personal Property

If you are in a declared disaster area and are the victim of a disaster, you may be eligible for financial assistance from the U.S. Small Business Administration - even if you don't own a business. As a homeowner, renter and/or personal-property owner, you may apply to the SBA for a loan to help you recover from a disaster.

This brochure describes the type of assistance available and answers the most frequently asked questions about the SBA's disaster-assistance program for individuals. Where practical,assistance with completing the application will be available.

Assistance Available

As an individual, there is one basic loan, with two purposes, available to you:

Personal Property Loan: This loan can provide a homeowner or renter with up to $40,000 to help repair or replace personal property, such as clothing, furniture, automobiles, etc., lost in the disaster. As a rule of thumb, personal property is anything that is not considered realestate or a part of the actual structure. This loan may not be used to replace extraordinarily expensive or irreplaceable items, such as antiques, collections, pleasure boats, recreational vehicles, fur coats, etc.

Real Property Loan: A homeowner may apply for a loan of up to $200,000 to repair or restore their primary home to its pre-disaster condition. The loan may not be used to upgrade the home or make additions to it. If, however, city or county building codes require structural improvements,the loan may be used to meet these requirements. Loans may be increased by as much as 20 percent to protect the damaged real property from possible future disasters of the same kind.

Note: A renter may apply only for a personal property loan.

 Insurance Proceeds: If you have insurance coverage on your personal property/home, the amount you will receive from the insurance company will be deducted from the total damage to your property in order to determine the amount for which you are eligible to apply to the SBA.

If you are required to apply insurance proceeds against an outstanding mortgage, the amount applied can be included in your disaster loan. If, however, you voluntarily apply insurance proceeds against an outstanding mortgage, the amount applied cannot be included in your disaster loan.

If you have not made a settlement or are having trouble reaching an agreement with your insurance company, you may apply for a loan in the full amount of your damages and assign any insurance proceeds to be received to the SBA.

Interest Rates on Loans: The law requires a test of your ability to obtain funds elsewhere in order to determine the rate of interest that will be charged on your loan. This credit-elsewhere test also applies to applicants for both personal property and real property loans.

Applicants Who Can Obtain Credit Elsewhere: The interest rate to be charged is based on the cost of money to the U.S. government, but will not be more than 8 percent per year.

Applicants Determined Unable to Obtain Credit Elsewhere: The interest rate to be charged will be half of the interest rate charged to applicants determined to be able to obtain credit elsewhere, but will not be more than 4 percent per year.

Term of Loan: The maximum maturity, or repayment term of an SBA loan, is set at 30 years. However, the SBA will determine repayment terms on a case-by-case basis according to your ability to repay.

Frequently Asked Questions About SBA Loans

Q. How much can I borrow? A. The amount of money that the SBA will lend you will be based upon the actual cost of repairing or replacing your home and/or personal property, minus any insurance settlements or other reimbursements or grants. The total loan amount is subject to the limits set out above.

Q. Must I use my own money or try to borrow from a bankbefore coming to the SBA?A. No.  

Q. I already have a mortgage on my home. I can't afford a disaster loan plus my current mortgage payment. Can the SBA refinance my mortgage? 

A. In certain cases, yes. The SBA can refinance all or part of prior mortgages, evidenced by a recorded lien, when the applicant: 1) does not have credit available elsewhere; 2) has suffered substantial uncompensated disaster damage (40 percent or more of the value of the property); and 3) intends to repair the damage. An SBA disaster loan officer can provide more detailed information on your specific situation. 

Q. What information do I need to submit for a home and/or personal property loan? A. The necessary information is specified in the loan application. In all cases, it includes an itemized list of personal property losses with the repair or replacement cost of each item. It also includes permission for the IRS to give the SBA information from your last two federal income tax returns. If you have pictures of the damaged property, you can include them as well. 

Q. Will the SBA check the losses I claim? A. Yes. Once you have returned your loan application, an SBA loss verifier will visit you to determine the extent of the damage and the reasonableness of the loan request.  

Q. How soon will I know if I qualify for a loan? A. That depends on how soon you file a complete SBA loan application. The SBA disaster relief program is not an immediate emergency relief program such as Red Cross assistance, temporary housing assistance, etc. It is a loan program to help you in your long-term rebuilding and repairing. To make a loan, we have to know the cost of repairing the damage, be satisfied that you can repay the loan, and take reasonable safeguards to help make sure the loan is repaid. The SBA loan application asks for the information we need. The faster you return it with all the needed information, the faster we can work on it. We try to make a decision on each complete application within seven to 21 days. Applications filed early can be completed in a much shorter time. We process applications in the order received, so file early. Be sure your application is complete; missing information is the biggest cause of delay. 

Q. How soon can I expect the money? A. Loans over $10,000 have to be secured. We won't decline a loan just because you do not have enough collateral, but we do ask for whatever collateral is available. This means that after a loan is approved there are other steps you must take. Usually, the security consists of a first or second mortgage on the damaged real estate. After we approve the loan, we will tell you what documents are needed to close theloan. You return the loan-closing documents to us, we can order the checks. You will receive the money in installments as you need it to repair or replace the damage. 

Q. Should I wait for my insurance settlement before I apply to the SBA? A. No. If you do not know how much of your loss will be covered by insurance or other sources, the SBA will consider making a loan for the full amount of the loss, up to our loan limits, provided that you assign the insurance check to the SBA to reduce the amount of the loan.

Q. I would like to get a contractor's estimate for the cost of repairing damage to my home, but I'm having trouble finding one. Should I hold up my application until I get the estimate? A. No. You might miss the deadline for filing your application while waiting for a contractor's estimate. If you have an estimate, include it. The SBA will verify any damage estimates listed on your loan application. Also,the sooner you file a completed application, the sooner the SBA can process it. 

Q. If I receive a disaster loan, may I spend the money any way I want? A. No. The disaster loan is intended to help you return your property to the same condition it was in before the disaster. Your loan will be made for specific and designated purposes. Remember that the penalty for misusing disaster funds is immediate repayment of one-and-a-half times the original amount of the loan. The SBA requires that you obtain receipts and maintain good records of all loan expenditures as you restore your damaged property and that you keep these receipts and records for three years.

Q. If my home is completely destroyed, can the SBA lend me money to relocate my home somewhere else? A. If you are unable to obtain a building permit to rebuild or replace your home at its original site, the cost of relocating your home might be included in the loan amount. If, however, you decide to relocate your home without being required to, an SBA loan can be obtained only for the exact amount of the damage. SBA can not make loans involving some relocations. An SBA disaster loan officer can provide more detailed information on your specific situation. 

Q. I am a farmer. My home was damaged, and so were my barns, fences, and some of my crops. Am I eligible to apply for SBA assistance? A. You may apply to the SBA for a loan to cover the damage to your home and its contents only. But it may be in your interest to seek assistance first from the U.S. Department of Agriculture for all your damage. 

Q. Are secondary homes or vacation homes eligible for loans? A. No, not as homes. They may be eligible for business disaster loans under certain conditions

Q. Are there any other limitations? A. Yes. Generally, loans will not be made for damage to personal pleasure boats, planes, recreational vehicles, antiques, collections, etc. Also, amounts for landscaping, family swimming pools, etc., are limited.

Q. Is there a minimum monthly payment, and when would the first payment be due? A. The SBA does not have a minimum monthly payment. Payments vary depending upon income and expenses, size of family and other circumstances that may affect your repayment ability. Generally, the first payment is not due until five months after the date of the loan. 

Q. I had to remove debris from my property after the disaster. Can this expense be included in my loan application? A. Yes, but your own labor and that of family members cannot be included. Amounts paid to others and any equipment rental can be listed as part of repairs to realestate. Remember that the maximum loan limit on realestate damage is $200,000, and debris removal is included in the limit. 

Q. May people over the age of 65 apply for help from the SBA? A. Yes. Loans are made without regard to age.

Q. I've heard that SBA loan applications are complicated and hard to complete. Is this true? A. No. The application form asks you the same information that any bank would request before lending you money. If you need help, SBA disaster personnel are available to explain the forms and give you assistance at no charge. You may use the services of accountants or attorneys if you wish, but be sure they are reliable and that their fees are reasonable. If you choose to use an attorney or an accountant, you must report those fees on your SBA loan application form. 

Q. Are damages to cars and mobile homes eligible? A. Generally, yes. The loan would be only for uninsured losses. 

Q. Do I need flood insurance to get a loan? A. If you are in a special flood hazard area, you must have flood insurance before we can disburse a loan. The amount of insurance required is the insurable value ofthe property in the special flood hazard area but not to exceed the maximum flood insurance available under the National Flood Insurance Act.

Certified Development Company (504) Loan Program

The CDC/504 loan program is a long-term financing tool for economic development

within a community. The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. Each CDC covers a specific geographic area. (Find the CDC in your area.)

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 (backed by 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.

Maximum DebentureThe maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal (see below).

The maximum SBA debenture is $2.0 million when meeting a public policy goal. The public policy goals are as follows:

Business district revitalization Expansion of exports Expansion of minority business development Rural development Increasing productivity and competitiveness Restructuring because of federally mandated standards or policies Changes necessitated by federal budget cutbacks Expansion of small business concerns owned and controlled by veterans (especially service-

disabled veterans) Expansion of small business concerns owned and controlled by women

The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has:

1. Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS); and

2. All of its production facilities located in the United States.

In order to qualify for a $4 million 504 loan, the Small Manufacturer must 1) meet the definition of a Small Manufacturer described above, and 2) either (i) create or retain at least 1 job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or (ii) improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].

WHAT FUNDS MAY BE USED FOR:

Proceeds from 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.

TERMS, INTEREST RATES AND FEES:

IInterest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately three (3) percent of the debenture and may be financed with the loan.

COLLATERAL:

Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

ELIGIBLE BUSINESSES:

To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

Micro-Loans

The MicroLoan Program provides very small loans to start-up, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $10,500. Applications are submitted to the local intermediary and all credit decisions are made on the local level.

TERMS, INTEREST RATES AND FEES:

The maximum term allowed for a microloan is six years. However, loan terms vary according to the size of the loan, the planned use of funds, the requirements of the intermediary lender, and the needs of the small business borrower. Interest rates vary, depending upon the intermediary lender and costs to the intermediary from the U.S. Treasury.

COLLATERAL

Each intermediary lender has its own lending and credit requirements. However, business owners contemplating application for a microloan should be aware that intermediaries will generally require some type of collateral, and the personal guarantee of the business owner.

TECHNICAL ASSISTANCE

Each intermediary is required to provide business based training and technical assistance to its microborrowers. Individuals and small businesses applying for microloan financing may be required to fulfill training and/or planning requirements before a loan application is considered.

Find a Microloan Intermediary in Your Area

Contract Surety Bonds

What's a Surety Bond?

A surety bond is a three-party instrument between a surety, the contractor and the project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed. Below are the four types of contract bonds that may be covered by an SBA guarantee:

1. Bid - Bond which guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds.

2. Payment - Bond which guarantees payment from the contractor of money to persons who furnish labor, materials equipment and/or supplies for use in the performance of the contract.

3. Performance - Bond which guarantees that the contractor will perform the contract in accordance with its terms.

4. Ancillary - Bonds which are incidental and essential to the performance of the contract.

SBA's Role

The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.

Eligibility

A contractor applying for an SBA bond guarantee must qualify as a small business, in addition to meeting the surety's bonding qualifications. Businesses in the construction and service industries can meet SBA's size eligibility standards if their average annual receipts, including those of their affiliates, for the last three fiscal years do not exceed $6 million. Local SBA offices can answer questions dealing with size standard eligibility.

Types of Eligible Bonds

Bid bonds and final bonds are eligible for an SBA guarantee if they are executed in connection with an eligible contract and are of a type listed in the "Contract Bonds" section of the current Manual of Rules, Procedures and Classifications of the Surety Association of America (SAA). Ancillary bonds may also by eligible for SBA's guarantee. [ For futher information and clarification, please contact our nearest field office.]

Size of Eligible Contracts

The SBA can guarantee bonds for contracts up to $2 million.

SBA Guarantee

The SBA reimburses a participating surety (within specified limits) for the losses incurred as a result of a contractor's default on a guaranteed bid bond, payment bond, performance bond or any bond that is ancillary with such a bond. Activity is accomplished through the Prior Approval program or the Preferred Surety Bond (PSB) program.

Under the Prior Approval program, the agent reviews the application package and recommends it to the surety company for approval. If the surety company agrees to issue a bond with the SBA guarantee, the package is forwarded to the appropriate SBA/SBG Area Office and evaluated by SBG personnel. If the applicant is determined to be qualified and approval is reasonable in light of the risk, SBA may issue a guarantee to the surety company. The surety then issues the bond to the contractor. SBA's guarantee agreement is with the surety company not with the small business contractor.

Any surety company certified by the U.S. Treasury to issue bonds may apply for participation in the Prior Approval program, but its bonds are subject to SBA's prior review and approval. Contractors bonded under this program are generally smaller and less experienced than contractors bonded under the Preferred Surety Bond (PSB) program. To compensate surety companies for the risk associated with bonding Prior Approval contractors, SBA guarantees 90 percent of the losses incurred on bonds up to $100,000 and on bonds to socially and economically disadvantaged contractors, and 80 percent of the losses incurred on all other bonds under this program.

The Preferred Surety Bond (PSB) program was established by P.L. 100-590 in November, 1988. The PSB program provides a 70 percent guarantee to participating sureties, but in exchange, prior SBA approval for each bond is not required. Under this program, the SBA gives selected sureties the authority to issue, monitor and service bonds without our prior approval. Each participating company has a guarantee limit with the SBA. The PSB program was created to encourage the larger surety companies to expand their efforts to help small businesses obtain bonds. Sureties participating in this program cannot

participate in the Prior Approval program.

Fourteen major sureties have become participants in the PSB program. PSB surety companies serve more experienced contractors that demonstrate the potential for growth and consistently have more active work programs. PSB sureties expect the contractors to graduate from the program in approximately three years. This program is managed by SBA's Office of Surety Guarantees in Washington, DC. Current authority for the program will expire on September 30, 2003. The following major factors guide, but do not limit, SBA's selection process of sureties to participate in the PSB program:

A PSB surety must have an underwriting limitation of at least $2,000,000, as determined by the U.S. Treasury Department Circular 570 or "T-list" of acceptable sureties.

Rates charged by a PSB surety are to be no greater then the Surety Association of America's (SAA) advisory premium rates in effect on August 1, 1987.

The premium income from contract bonds guaranteed by SBA and any other government agency shall not exceed one-quarter of its total contract bond premium income.

Underwriting authority for SBA guaranteed bonds is vested only in employees of the surety.

Final settlement authority for claims and recovery under PSB is vested only in employees of the surety's permanent claims department.

The rating or ranking assigned to the surety by a recognized authority.

The PSB surety shall execute a Preferred Surety Bond Guarantee Agreement with SBA.

Interested surety companies should send a letter formally requesting participation in the program to: Associate Administrator, Office of Surety Guarantees, U.S. Small Business Administration, Suite 8600, 409 Third Street, SW, Washington, D.C., 20416. Duties of Contractor

Contractors should apply for a specific bond with an agent or surety company of their choice, providing background, credit and financial information required by the surety company and the SBA.

The contractor must complete the following forms, which are available from participating agents (a list of agents is available from your local SBA district office)

SBA Form 994: Application for Surety Bond Guarantee Assistance

SBA Form 912: Statement of Personal History (on first application and once every two calendar years thereafter)

SBA Form 994F: Schedule of Uncompleted Work on Hand (required initially and then at least quarterly)

SBA Form 1624: Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion Lower Tier Covered Transactions

SBA Form 1261: Statement of Laws and Executive Orders

Duties of Surety Company

After the contractor completes the forms and furnishes the surety company with sufficient underwriting information, the surety company processes and underwrites the application in the same manner as any

other contract bond application. The surety company decides whether to:

Execute the bond without the SBA's guarantee;

Execute the bond only with the SBA's guarantee; or

Decline the bond even with the SBA's guarantee.

If the surety company determines an SBA guarantee is required in order to provide the bond, it completes an SBA Form 994B: Underwriting Review and the SBA Form 990: Guarantee Agreement. If the guarantee is given under the Prior Approval program, these forms - and supporting documents - are submitted along with the Forms 994, 912, 994F, 1624 and 1261 to the appropriate SBA/SBG Area Office. If the guarantee is given under the PSB program, the forms are collected by the surety.

Duties of the SBA

Under the Prior Approval program the SBA determines an applicant's ability to complete the contract based on the information, documentation and underwriting rationale provided by the surety company. If the review establishes performance capacity, and all other aspects of the application are approved, an authorized SBA official signs a guarantee agreement and returns it to the surety company. If the review fails to establish performance capacity, the SBA seeks clarification from the surety underwriter. If performance capacity cannot be reasonably assured, the SBA rejects the application.

Cost of an SBA Guaranteed Bond

The SBA charges fees to both the contractor and the surety company, as described in the most recent edition of 13 CFR 115 :

SBA does not charge contractors an application or bid bond guarantee fee. If SBA guarantees a final bond, the contractor must pay a guarantee fee equal to a certain percentage of the contract amount. The percentage is determined by SBA and is published in notices in the Federal Register from time to time.

When the bond is issued, the small business pays the surety company's bond premium. This charge cannot exceed the level approved by the appropriate state regulatory body.

The surety company pays the SBA a guarantee fee on each guaranteed bond (other than a bid bond) in the ordinary course of business. The fee is a certain percentage of the bond premium, determined by SBA and is published in notices in the Federal Register from time to time.

Specific FAQs

Regarding SBA's Surety Bond Program

1. Does SBA issue bonds?

No. SBA does not issue bonds. However SBA does provide a guarantee for bid, performance, and payment bonds issued by participating surety companies.

2. What type of businesses are eligible to participate in the program? -

Generally, all small businesses, whether they are sole-proprietorships, partnerships, or corporations are eligible to participate in SBA's surety bond guarantee programs.

3. How do I obtain a SBA guarantee?

SBA's contractual relationship as it pertains to the guarantee, is directly with the Surety Company or its agent and/or managing general agents. It is the surety who issues the bond to a small business contractor. Therefore, a small contractor must first find an agent or surety company.

4. What is an agent and how do I find an agent?

An agent is an individual who has power of attorney (POA) to issue bonds on behalf of a surety. Many agents have POAs- for several surety companies. The SBA District Offices provide current listings of agents located throughout the state, who participate or have formerly participated in SBA's bond guarantee programs.

5. What is the maximum contract size that can be considered for SBA's Bond guarantee?

Individual contracts of $2 million or less are eligible for SBA's bond Guarantee. There is no limit to the number of bonds that can be Guaranteed- for any one contractor.

6. Can I change agents and/or surety companies?

SBA does not designate a particular agent or surety company for a small contractor. The small contractor is free to change agents or sureties at their own discretion.

7. My business is incorporated in one state; however, most of my work is done in another. Which SBA office would handle my application?

The SBA Area Office located in the state where the business is domiciled is where the application will be handled. In this case the Area office is in Atlanta, GA which is responsible for processing South Florida- applications.

8. Do I have to be an 8(a) contractor or Certified Small Disadvantaged Business (SDB) to participate. -

No. You do not have to be a participant in either 8(a0 or SDB in order to Participate in SBA's surety bond guarantee programs.

9. Can I get a SBA bond guarantee even though I'm not an U.S. citizen?

Yes. You can receive a SBA guarantee even if you are not an U.S. citizen. Nevertheless, you must be a legal alien bearing a registration card, which entitles you to work in the United States. Illegal aliens are not eligible.

10. What are my cost- associated with obtaining an SBA surety bond Guarantee? -

All final bond applications, and all bid bonds resulting in awards, require a processing fee of $6.00 per thousand dollar of the contract face value. You pay the processing fee, however I the event of cancellation, or if for some reason the bond is not issued, the processing fee will be returned.

11. Does SBA charge the contractor for the bid bond as well as final bond guarantees?

SBA does not charge a contractor for bid bond guarantees. The Contractor's fee applies to a final bond guarantee only.

12. How long does it take for SBA to process an application?

Generally, it takes only three to five days for our Atlanta Office to process a properly completed

application for a SBA guarantee.

13. As a prime contractor, will the SBA guarantee of my bond also cover my subcontractors?

No. Your SBA guarantee bond is a tri-party agreement between you the Contractor, SBA, and the surety. If your subcontractors fail to Satisfactorily complete their portion of the work, and thus cause a breach In your general contract with the obligee, the obligee has recourse under your SBA guarantee bond. On the other hand, if the subcontractors have been bonded back, then you have recourse under their bonds.

14. How long can I participate in the program?

There is no limit on the length of time that a contractor may participate- In SBA's surety bond program; however, the goal is to help contractors to become bondable without SBA assistance.

If you have any questions concerning the surety bond guarantee program, please contact Pam Swilling at (202)205-6546, or e-mail pam.swilling@sba.gov.

Surety Bond Industry Associations & Resources

If you think you might need the benefits of a surety bond, learn as much as you can about the industry and available resources.

Jeff ShoafSenior ExecutiveAssociated General Contractors of America (AGC)333 John Carlyle Street, Suite 200Alexandria, VA 22314(703) 837-5312; FAX: (703) 837-5400

AGCA is a non-profit entity serving the construction industry since 1922 with local chapters in every major city. It is committed to enhancing the professional construction industry and raising its visibility withinAmerica's business and legislative arenas. -

Mr. Robert E. VagleyPresidentAmerican Insurance Association1130 Connecticut Avenue, NW Suite 1000Washington, D.C. 20036(202) 828-7100 FAX: (202) 293-1219

AIA is a non-profit organization representing insurance companies across the United States. It is the main lobbying arm for the insurance industry.

Susan LynchDirectorSection of Tort and Insurance PracticeAmerican Bar Association (ABA)750 North Lake Shore DriveChicago, IL 60611(312) 988-5650; FAX: (312) 988-6230

This is the section of the American Bar Association where Fidelity and Surety issues are addressed. They also provide educational opportunities. Mr. Robert E. Hirshon, Portland, ME, will replace Mr. Beckham in the Fall of 1996.

Ms. Lynn M. Schubert President Surety Association of America 1101 Connecticut Ave, NW, Suite 800 Washington DC 20036 Phone 202/463 0600 FAX 202/463-0606

SAA was formed in the early 1900s and is the trade association for fidelity and surety lines of business. As a licensed rating or advisory organization for the industry, it operates in all states, the District of Columbia and Puerto Rico. SAA provides a forum for suretyship problems and education opportunities and assists in developing potential markets and promotes the interests of suretyship in the U.S. and abroad.

Andy FaustThe American Surety Association (TASA)9841 Airport Boulevard, Suite 916-Los Angeles, CA 900451(800) 486-6695

TASA is an organization of members of the surety bond industry who specialize in small business contracts. It fosters greater interaction between surety firms, contractors, agents, attorneys and accountants involved in speciality- surety bonding. It provides support to small, minority and emerging businesses, and promotes public awareness of the speciality surety industry.

Mr. Richard A. Foss Executive Vice PresidentNational Association of Surety Bond Producers5225 Wisconsin Avenue, N.W.Suite 600Washington, D.C. 20015-2014(202) 686-3700 FAX: (202) 686-3656

NASBP is an organization of insurance agency and brokerage firms that are recognized as specialists in providing corporate surety bonding and insurance for construction contractors. Established in 1942, it has approximately 650 member firms throughout the U.S., Puerto Rico, and Canada - a small percentage of the 80,000 insurance agencies operating in these areas.

Arthur QueenPresidentNational Association of Minority Contractors (NAMC)666 11th Street, NW, Suite 520Washington, DC 20001(202) 347-8259; FAX: (202) 628-1876

NAMC is a full service non-profit minority business trade association, established in 1969, to address the needs and concerns of minority contractors nationwide. Its membership covers 47 states, the -District of Columbia- and the U.S. Virgin Islands.

Marla McIntyreExecutive DirectorSurety Information Office (SIO)5225 Wisconsin Avenue, NW, Suite 600Washington, DC 20036

(202) 686-7463; FAX: (202) 686-3656

The Surety Information Office assists in the promotion and education of the surety bonding process. SIO is supported by the Surety Association of America and the National Association of Surety Bond Producers.

Equity Capital

Understanding Equity Capital

 

Equity capital or financing is money raised by a business in exchange for a share of ownership in the company. Ownership is represented by owning shares of stock outright or having the right to convert other financial instruments into stock of that private company. Two key sources of equity capital for new and emerging businesses are angel investors and venture capital firms.

Typically, angel capital and venture capital investors provide capital unsecured by assets to young, private companies with the potential for rapid growth. Such investing covers most industries and is appropriate for businesses through the range of developmental stages. Investing in new or very early companies inherently carries a high degree of risk. But venture capital is long term or “patient capital” that

allows companies the time to mature into profitable organizations.

Angel and venture capital is also an active rather than passive form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return on the investment. This requires active involvement and almost all venture capitalists will, at a minimum, want a seat on the board of directors.

Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments. A good investor will be considering potential exit strategies from the time the investment is first presented and investigated.

Differences Between Debt and Equity Capital

Debt Capital: Debt capital is represented by funds borrowed by a business that must be repaid over a period of time, usually with interest. Debt financing can be either short-term, with full repayment due in less than one year, or long-term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business and debt obligations are typically limited to repaying the loan with interest. Loans are often secured by some or all of the assets of the company.

Equity Capital: Equity capital is represented by funds that are raised by a business, in exchange for a share of ownership in the company. Equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time.

Angel Investors

Business “angels” are high net worth individual investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses. These self-made investors share many common characteristics:

They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value. (Many seed or start ups may not have a fully developed management team, but have identified key positions.)

They typically invest in ventures involved in industries or technologies with which they are personally familiar.

They often co-invest with trusted friends and business associates. In these situations, there is usually one influential lead investor (“archangel”) whose judgment is trusted by the rest of the group of angels.

Because of their business experience, many angels invest more than their money. They also seek active involvement in the business, such as consulting and mentoring the entrepreneur.

They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.

Venture Capital

Successful long-term growth for most businesses is dependent upon the availability of equity capital. Lenders generally require some equity cushion or security (collateral) before they will lend to a small business. A lack of equity limits the debt financing available to businesses. Additionally, debt financing requires the ability to service the debt through current interest payments. These funds are then not available to grow the business.

Venture capital provides businesses a financial cushion. However, equity providers have the last call against the company’s assets. In view of this lower priority and the usual lack of a current pay requirement, equity providers require a higher rate of return/return on investment (ROI) than lenders

receive.

Investment

Small Business Investment Company Program: Small Business Investment Companies (SBICs), which are licensed and regulated by the SBA, are privately owned and managed investment firms that provide venture capital and start-up financing to small businesses. The above link will take you to our Investment Division's Home Page where you will also find reference to the Small Business Investment Act.

Check out the link above to learn more!

Find an SBA Investment Company on the SBA website by going to Financing, then Find an SBAIC.

Special Purpose Loan Programs

Export Working Capital

The Export Working Capital Program (EWCP) was designed to provide short-term working capital to exporters.

The SBA's Export Working Capital Program (EWCP) supports export financing to small businesses when that financing is not otherwise available on reasonable terms. The program encourages lenders to offer export working capital loans by guaranteeing repayment of up to $1.5 million or 90 percent of a loan amount, whichever is less. A loan can support a single transaction or multiple sales on a revolving basis.

Designed to provide short-term working capital to exporters, the EWCP is a combined effort of the SBA and the Export-Import Bank. The two agencies have joined their working capital programs to offer a unified approach to the government's support of export financing. The EWCP uses a one-page application form and streamlined documentation with turnaround usually 10 days or less. A letter of prequalification is also available from the SBA.

Maximum 7(a) Loan Amounts

Export Working Capital Program Eligibility (EWCP)

In addition to the eligibility standards listed below, an applicant must be in business for a full year (not necessarily in exporting) at the time of application. SBA may waive this requirement if the applicant has sufficient export trade experience. Export management companies or export-trading companies my use this program; however, title must be taken in the goods being exported to be eligible.

Most small businesses are eligible for SBA loans; some types of businesses are ineligible and a case-by-case determination must be made by the Agency. Eligibility is generally determined Business Type, Use of Proceeds, Size of Business, and Availability of Funds from other sources. The following links provide more detailed information about each of these areas.

TYPE OF BUSINESSES ELIGIBLE

USE OF LOAN PROCEEDS:

SIZE

AVAILABILITY

The proceeds of an EWCP loan must be used to finance the working capital needs associated with a single or multiple transactions of the exporter.

Proceeds may not be used to finance professional export marketing advice or services, foreign business travel, participating in trade shows or U.S.support staff in overseas, except to the extent it relates directly to the transaction being financed. In addition, "proceeds may not be used" to make payments to owners, to pay delinquent withholding taxes, or to pay existing debt.

The applicant must establish that the loan will significantly expand or develop an export market, is currently adversely affected by import competition, will upgrade equipment or facilities to improve competitive position, or must be able to provide a business plan that reasonably projects export sales sufficient to cover the loan.

Export Working Capital Program (EWCP) Maturities SBA guarantees the short-term working capital loans made by participating Lenders to exporters. An export loan can be for a single or multiple transactions. If the loan is for a single transaction, the maturity should correspond to the length of the transaction cycle with a maximum maturity of 18 months. If the loan is for a revolving line of credit, the maturity is typically twelve (12) months, with annual reissuances allowed two times, for a maximum maturity of three years. Four Unique Requirements of the EWCP Loan

1. An applicant must submit cash flow projections to support the need for the loan and the ability to repay.

2. After the loan is made, the loan recipient must submit continual progress reports. SBA does not prescribe the Lender’s fees.

3. SBA does not prescribe the interest rate for the EWCP. 4. SBA guarantees up to ninety (90) percent of an EWCP loan amount up to $1.5 million.

Guaranty Percents

For those applicants that meet the SBA's credit and eligibility standards, the Agency can guaranty up to ninety (90%) percent of loans (generally up to a maximum guaranty amount of $1.5 million).

Export Working Capital Program Loans (EWCP) Collateral

A borrower must give SBA a first security interest equal to 100% of the EWCP guaranty amount. Collateral must be located in the United States.

Export Express

SBA Export Express combines the SBA’s small business lending assistance with its technical assistance programs to help small businesses that have traditionally had difficulty in obtaining adequate export financing. The pilot program is available throughout the country and is expected to run through September 30, 2005.

SBA Export Express helps small businesses that have exporting potential, but need funds to buy or produce goods, and/or to provide services, for export. Loan proceeds may be used to finance export development activities such as:

• Participation in a foreign trade show; • Translation of product brochures or catalogues for use in overseas markets; • General lines of credit for export purposes;

• Service contracts from buyers located outside the United States; • Transaction-specific financing needs associated with completing actual export orders; and/or • Purchase of real estate and equipment to be used in production of goods or services which will be expansion, • Provide term loans and other financing to enable small business concerns, including export trading companies and export management companies, to develop foreign markets; and • Acquire, construct, renovate, modernize, improve or expand productive facilities or equipment to be used in the United States in the production of goods or services involved in international trade.

Who Can Use this Program?

SBA Export Express loans are available to persons who meet the normal requirements for an SBA business loan guaranty. Loan applicants must also –

- demonstrate that the loan proceeds will enable them to enter a new export market or expand an existing export market, and

- have been in business operation, though not necessarily in exporting, for at least 12 months.

How Does the Program Work?

Any lender that is authorized to participate in the SBA Express loan program may participate in SBA Export Express. SBA Export Express lenders use streamlined and expedited loan review and approval procedures to process SBA guaranteed loans. The lender uses its own loan analyses, loan procedures and loan documentation. Completed loan applications are submitted for approval to the SBA’s processing center in Sacramento, California. The SBA provides the lender with a response, typically within 36 hours.

What is the SBA Guaranty?

The SBA guaranty encourages lenders to make loans to small business exporters that they might not make on their own. The SBA’s Export Express guaranty is 85 percent for loans up to $150,000 and 75 percent for loans more than $150,000 up to a maximum loan amount of $250,000. The maximum loan amount under Export Express is $250,000.

Terms, Interest Rates and Fees

Interest rates are negotiated between the borrower and the lender. Rates can either be fixed or variable, and are tied to the prime rate as published in The Wall Street Journal. Lenders may charge up to 6.5 percent over prime rate for loans of $50,000 or less and up to 4.5 percent over the prime rate for loans over $50,000.

Like most 7(a) loans, the maturity of an SBA Export Express term loan is usually five to 10 years for working capital, 10 to 15 years for machinery and equipment (not to exceed the useful life of the equipment), and up to 25 years for real estate. The maturity for revolving lines of credit may not exceed five years.

The guaranty and servicing fees under SBA Export Express are the same as for regular SBA 7(a) guaranty loans. (Link to Fees)

Technical Assistance

Because many small business exporters face unique problems and challenges, the SBA Export Express Program also includes technical assistance in the form of marketing, management and planning assistance.

Technical assistance is provided by SBA’s U.S. Export Assistance Centers, in cooperation with SBA’s network of resource partners, including the Small Business Development Centers (SBDCs) and Service Corps of Retired Executives (SCORE).

On approval of an SBA Export Express loan, a U.S. Export Assistance Center representative will contact the borrower to offer appropriate assistance. This assistance may include training offered through the

SBA’s Export Trade Assistance Partnership, SBDC International Trade Center, SCORE, District Export Council, or Export Legal Assistance Network.

What About My Other Financing Needs?

The SBA offers a range of long- and short-term financing options for small business exporters including the Export Working Capital Program (EWCP) and the International Trade loans. Information on both of these loans can be foundby selecting the link in the left hand column. For more information about SBA Export Express or other SBA export assistance programs, please contact the SBA representative in the U.S. Export Assistance Center nearest you.

Defense Loan and Technical Assistance (DELTA) Program

SBA's Defense Economic Transition Assistance program is designed to help eligible small business contractors to transition from defense to civilian markets.

A small business is eligible if it has been detrimentally impacted by the closure (or substantial reduction) of a Department of Defense (DoD) installation, or the termination (or substantial reduction) of a Department of Defense Program on which the small business was a prime contractor, subcontractor, or supplier at any tier. In addition a business can be deemed eligible if it is located in community that has been detrimentally impacted by these same actions.

The DELTA program provides financial and technical assistance to defense-dependent small businesses which have been adversely affected by defense reductions. The goal of the program is to assist these businesses to diversify into the commercial market while remaining part of the defense industrial base. Complete information on eligibility and other rules is available from each SBA district office.

This program can be used in conjunction with both SBA’s 7(a) and 504 Loan Programs and generally follows the provisions of each program. In order to be eligible for this program, small businesses must derive at least 25 percent of its revenues from Department of Defense or defense-related Department of Energy contracts or subcontracts in support of defense prime contracts in any one of five prior operating years.

Small businesses interested in utilizing this program must also meet at least one of the program's policy objectives:

• Job retention --- retains defense employees • Job creation --- creates job opportunities and new economic activities in impacted communities • Plant retooling and expansion ---modernizes or expands the plant and enables it to remain available to the Department of Defense.

U.S. COMMUNITY ADJUSTMENT AND INVESTMENT PROGRAM (CAIP)

GENERAL DESCRIPTION

CAIP is a program established to assist U.S. companies that are doing business in areas of the country that have been negatively affected by NAFTA. Funds administered by Treasury (see below) allow for the payment of fees on eligible loans. These fees include the 7(a) program guarantee fee (and subsidy) and the 504 program guarantee, CDC and lender fees. Depending on the loan size, the fees can be sizeable.

The CAIP works with the SBA in both their 7(a) Loan Guarantee Program and 504 Program to reduce borrower costs and increase the availability of these proven business

assistance programs. CAIP can be used with both the 7(a) and 504 Loan Programs

ELIGIBILITY

To be eligible, certain criteria must be met; for example, the business must reside in a county noted as being negatively affected by NAFTA, based on job losses and the unemployment rate of the county; this was recently expanded to allow for granting eligibility to defined areas within a county (which will allow SBA to react quickly in offering to provide assistance when, for example, a plant closes).

In addition, there is a job creation component. For 7(a) loans, one job has to be created for every $70,000 SBA guarantees. For 504 loans, one job has to be created for every $50,000 SBA guarantees.

ELIGIBLE CAIP COMMUNITIES

Currently, over 230 counties in 29 states are designated as eligible. Here is a listing of all communities (PDF File)which have been designated as eligible for funding under the Community Adjustment and Investment Program (CAIP). This second file contains theeligible zip codes for urban communities.

Qualified Employee Trusts Loan Program

The objective of this program is to provide financial assistance to Employee Stock Ownership Plans. The employee trust must be part of a plan sponsored by the employer company and qualified under regulations set by either the Internal Revenue Service Code (as an Employee Stock Ownership Plan or ESOP) or the Department of Labor (the Employee Retirement Income Security Act or ERISA). Applicants covered by the ERISA regulations must also secure an exemption from the Department of Labor regulations prohibiting certain loan transactions.

Loan Amounts Available for Qualified Employee Trusts Loans

Effective December 22, 2000, a maximum loan amount of $2 million has been established for 7(a) loans. However, the maximum dollar amount the SBA can guaranty is generally $1 million. Small loans carry a maximum guaranty of 85 percent. Loans are considered small if the gross loan amount is $150,000 or less. For loans greater than $150,000, the maximum guaranty is 75 percent.

Who is Eligible for a Qualified Employee Trusts Loan?

SBA can assist qualified employee trusts that meet the requirements and conditions for an Employee Stock Ownership Plan (ESOP) as prescribed in all applicable IRS, Treasury, and Department of Labor regulations. The small business must provide all the funds needed to collaterize and repay the loan. A qualified employee trust may:

• re-lend proceeds to the employer by purchasing qualified employer securities, or • purchase a controlling interest in the employer.

SBA Loan Maturities

Interest Rates Fees Guaranty Percent

Pollution Control Loan Program

Pollution Control Loans are 7(a) loans with a special purpose of pollution control. The program is designed to provide financing to eligible small businesses for the planning, design, or installation of a pollution control facility. This facility must prevent, reduce, abate, or control any form of pollution, including recycling.

This program follows the 7(a) guidelines with the following exception. Use of proceeds must be for fixed-assets only

CAPlines Loan Program

CAPLines is the umbrella program under which the SBA helps small businesses meet their short-term and cyclical working-capital needs. A CAPLines loan, Except the Small Asset-Based Line, can be for any dollar amount that does not exceed SBA's limit. (See the 7(a) Loan program for more information on SBA's Basic Requirements.)

There are five short-term working-capital loan programs for small businesses under the CAPLines umbrella:

SEASONAL LINE: These are advances against anticipated inventory and accounts receivable help during peak seasons when businesses experience seasonal sales fluctuations. Can be revolving or non-revolving.

CONTRACT LINE: Finances the direct labor and material cost associated with performing assignable contract(s). Can be revolving or non-revolving.

BUILDERS LINE: If you are a small general contractor or builder constructing or renovating commercial or residential buildings, this can finance direct labor-and material costs. The building project serves as the collateral, and loans can be revolving or non-revolving.

STANDARD ASSET-BASED LINE: This is an asset-based revolving line of credit for businesses unable to meet credit standards associated with long-term credit. It provides financing for cyclical growth, recurring and/or short-term needs. Repayment comes from converting short-term assets into cash, which is remitted to the lender. Businesses continually draw from this line of credit, based on existing assets, and repay as their cash cycle dictates. This line generally is used by businesses that provide credit to other businesses. Because these loans require continual servicing and monitoring of collateral, additional fees may be charged by the lender.

SMALL ASSET-BASED LINE: This is an asset-based revolving line of credit of up to $200,000. It operates like a standard asset-based line except that some of the stricter servicing requirements are waived, providing the business can consistently show repayment ability from cash flow for the full amount.

MAXIMUM LOAN AMOUNTS

Except the Small Asset-Based Line, CAPLine loans follow SBA's maximum loan amounts. The Small Asset-Based Line has a maximum loan amount of $200,000.

ELIGIBILITY

Although most small businesses are eligible for SBA loans, some types of businesses are ineligible and a case-by-case determination must be made by the Agency. Eligibility is generally determined by four factors:

TYPE OF BUSINESSES ELIGIBLE SIZEUSE OF PROCEEDS

LOAN MATURITIES

Each of the five lines of credit has a maturity of up to five (5) years,but, because each is tailored to an individual business's needs, a shorter initial maturity may be established. CAPLines funds can be used as needed throughout the term of the loan to purchase assets, as long as sufficient time is allowed to convert the assets into cash at maturity.

Interest RatesFees Guaranty Percent

COLLATERAL

Holders of at least 20% ownership in the business are generally required to guaranty the loan. Although inadequate collateral will not be the sole reason for denial of a loan request, the nature and value of that collateral does factor into the credit decision.

SBA partners

Certification Procedures to Become a Certified Development Company

The 504 Certified Development Company (CDC) Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide. Each CDC covers a specific geographic area.

CDC provides to small businessesA CDC must operate in and adequately service its Area of Operations. It must market the 504 program, package and process 504 loan applications, and close and service 504 loans. A CDC's loan portfolio must be diversified by business sector.

A CDC may provide small businesses with financial and technical assistance, or may help small businesses obtain such assistance from other sources, including preparing, closing, and servicing loans under contract with Lenders in SBA's 7(a) program.

A CDC also may loan amounts to the Borrower equal to the value of all or part of the Borrower's contribution to a Project in the form of cash or land, including site improvements, previously acquired by the CDC.

Applications for Certification as a CDC

A CDC must be a non-profit corporation in good standing. Applicants for certification as a CDC must apply to the SBA District Office serving the area in which the applicant has or proposes to locate its headquarters. A CDC must have a designated Area of Operations, specified by the CDC and approved by SBA. There can be only one statewide CDC in each state, which must foster economic development throughout the state and provide 504 assistance to areas not adequately served by other CDCs. .An SBA District Office may accept an application for a county only if:

(1) There is no CDC that includes the county in its Area of Operations; (2) Any CDCs that include the

county in their Areas of Operations have not averaged together at least one 504 loan approval per 100,000 population per year averaged over the 24 months prior to SBA receiving a complete application from the applicant; and the county has not become part of another CDC's Area of Operations within the prior 24 months; or (3) The county is part of the Area of Operations of only one CDC; the county has a population of 100,000 or more; the county has not become part of an Area of Operations within the prior 24 months of another CDC; the applicant is incorporated in the State where the county is located; and the CDC that includes the county in its Area of Operations submits a statement of no objection to the application.

An applicant whose application has been accepted must then demonstrate that it satisfies the certification and operating criteria in Secs. 120.820 through 120.829 and the need for 504 services in the Area Of Operations Applications must also include an operating budget approved by the applicant's Board of Directors, and a plan to meet CDC operating requirements (without specializing in a particular industry). An applicant's proposed Area of Operations may include Local Economic Areas. An applicant may not apply to cover an area as a Multi-State CDC. The AA/FA shall make the certification decision.

Public notice of CDC certification application

(a) As part of the application process, the applicant must publish a notice in a general circulation newspaper in the proposed Area of Operations, including the name and location of the proposed CDC, its purpose and Area of Operations, and the names and addresses of its officers and directors. The applicant shall send a copy of the notice to SBA. The notice shall provide the public at least 30 days to submit written comments to the District Office. The SBA shall consider the comments in making its decision on the application. (b) CDCs serving the proposed Area of Operations shall be directly notified and given at least 30 days to comment.

Probationary period for newly certified CDCs

(a) Newly certified CDCs will be on probation for a period of two years, at the end of which the CDC must petition for: (1) Permanent CDC status; (2) A single, one-year extension of probation; or (3) ADC status. (b) SBA will consider failure to file a petition before the end of the probationary period as a withdrawal from the 504 program. If the CDC elects ADC status or withdrawal, it must transfer all funded and/or approved loans to another CDC, SBA, or another servicer approved by SBA.

CDC membership

A CDC must have at least 25 members (or stockholders for for-profit CDCs approved prior to January 1, 1987). The CDC membership must meet annually. No person or entity may own or control more than 10 percent of the CDC's voting membership (or stock). Members must be representative of and provide evidence of active support in the Area of Operations. Members must be from each of the following groups:

(1) Government organizations responsible for economic development in the Area of Operations and acceptable to SBA; (2) Financial institutions that provide commercial long term fixed asset financing in the Area of Operations; (3) Community organizations dedicated to economic development in the Area of Operations such as chambers of commerce, foundations, trade associations, colleges, or universities; and (4) Businesses in the Area of Operations.

A CDC that is incorporated in one State and is operating as a Multi-State CDC in another State must meet the membership requirements for each State.

CDC Board of Directors

The CDC must have a Board of Directors chosen from the membership by the members, and representing at least three of the four membership groups. No single group shall control. No person who is a member of a CDC's staff may be a voting member of the Board except for the CDC manager. The Board Members must be responsible officials of the organizations they represent and at least one member other than the CDC manager must possess commercial lending experience. The Board must meet at least quarterly and shall be responsible for CDC staff decisions and actions. A quorum shall

require at least 5 Directors authorized to vote. When the Board votes on SBA loan approval or servicing actions, at least one Board Member with commercial loan experience acceptable to SBA, other than the CDC manager, must be present and vote. There must be no actual or apparent conflict of interest with respect to any actions of the Board.

(a) The Board may establish a Loan Committee of non-Board Members that reports to the Board. Loan Committee members must include at least one member with commercial lending experience acceptable to SBA. All members of the Loan Committee must live or work in the Area of Operations of the State where the 504 project they are voting on is located unless the project falls under one of the exceptions listed in Sec. 120.839, Case-by-case extensions. No CDC staff may serve on a Loan Committee. A quorum must have at least five committee members authorized to vote. The CDC's Board must ratify the actions of any Loan Committee. There must be no actual or apparent conflict of interest with respect to any actions of the Loan Committee.

(b) If the CDC is incorporated in one State and is approved as a Multi-State CDC to operate in another State, the CDC must meet the Board requirements for each State and must have a Loan Committee for each State.

Professional management and staff

A CDC must have full-time professional management, including an Executive Director (or the equivalent) managing daily operations. It must also have a full-time professional staff qualified by training and experience to market the 504 Program, package and process loan applications, close loans, service, and, if authorized by SBA, liquidate the loan portfolio, and sustain a sufficient level of service and activity in the Area of Operations. CDCs may obtain, under written contract, marketing, packaging, processing, closing, servicing or liquidation services provided by qualified individuals and entities who live or do business in the CDC's Area of Operations under the following circumstances:

(a) The CDC has at least one salaried professional employee that is employed directly (not contracted) full-time to manage the CDC. A CDC may petition SBA to waive the requirement of at least one full-time manager if: (1) The CDC is rural and has insufficient loan volume to justify its own management, and another CDC located in the same general area will provide the management; or (2) The management of a CDC is to be contributed by a non-profit affiliate of the CDC that has the economic development of the CDC's Area of Operations as one of its principal activities. In the latter case, the management contributed by the affiliate may work on and operate other economic development programs of the affiliate, but must be available to 504 customers during regular business hours. (b) SBA must pre-approve contracts the CDC makes for managing, marketing, packaging, processing, closing, servicing, or liquidation functions. (CDCs may contract for legal and accounting services without SBA approval, except for legal services in connection with loan liquidation or litigation.) (c) Contracts must clearly identify terms and conditions satisfactory to SBA that permit the CDC to terminate the contract prior to its expiration date on a reasonable basis. (d) The CDC must provide copies of these contracts to SBA for review annually. (e) If a CDC's Board believes that it is in the best interest of the CDC to contract for a management, marketing, packaging, processing, closing, servicing or liquidation function, the CDC's Board must explain its reasoning to SBA. The CDC's Board must demonstrate to SBA that: (1) The compensation under the contract is only from the CDC, reasonable and customary for similar services in the Area of Operations, and is only for actual services performed; (2) The full term of the contract (including options) is reasonable; and (3) The contract does not evidence any actual or apparent conflict of interest or self-dealing on the part of any of the CDC's officers, management, and staff, including members of the Board and any Loan Committee. (f) No contractor (under this section) or Associate of a contractor may be a voting or non-voting member of the CDC's Board.

Minimum level of CDC lending activity

A CDC must provide at least two 504 loan approvals each full fiscal year. A CDC's portfolio must reflect an average of one Job Opportunity per $35,000 of 504 loan funding.

What is the Microloan Program?

The Microloan Program assists women, low income individuals, minority entrepreneurs, and other small businesses which need small amounts of financial assistance. Under this program, SBA makes direct and guaranteed loans to Intermediaries (as defined below) who use the proceeds to make loans to eligible borrowers. SBA may also make grants under the program to Intermediaries and other qualified nonprofit entities to be used for marketing, management, and technical assistance to the program's target population.

Applying to become an Intermediary

Organizations interested in becoming Intermediaries should contact SBA for information on the application process. Applications should contain supporting information describing:(1) The types of businesses assisted in the past and those the applicant intends to assist with Microloans;(2) The average size of the loans made in the past and the average size of intended Microloans;(3) The extent to which the applicant will make Microloans to small businesses in rural areas;(4) The geographic area in which the applicant intends to operate, including a description of the economic and demographic conditions existing in the intended area of operations;(5) The availability and cost of obtaining credit for small businesses in the area;(6) The applicant's experience and qualifications in providing marketing, management, and technical assistance to small businesses; and(7) Any plan to use other technical assistance resources (such as counselors from the Service Corps of Retired Executives) to help Microloan borrowers.

Eligibility Criteria to become an Intermediary

To be eligible to be an Intermediary, an organization must:

(1) Have made and serviced short-term fixed rate loans of not more than $35,000 to newly established or growing small businesses for at least one year: and(2) Have at least one year of experience providing technical assistance to its borrowers.

An Intermediary may not operate in more than one state unless the AA/FA determines that it would be in the best interests of the small business community for it to operate across state lines

What are the terms and conditions of an SBA loan to an Intermediary

An Intermediary may not borrow more than $750,000 in the first year of participation in the program. In later years, the Intermediary's obligation to SBA may not exceed an aggregate of $3.5 million, subject to statutory limitations on the total amount of funds available per state.

During the first year of the loan, an Intermediary is not required to make any payments, but interest accrues from the date that SBA disburses the loan proceeds to the Intermediary. After that, SBA will determine the periodic payments. The loan must be repaid within 10 years.

The interest rate is equal to the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less 1.25 percent. However, the interest rate for Specialized Intermediaries is equal to the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less two percent.

As security for repayment of the SBA loan, an Intermediary must pledge to SBA a first lien position in the Microloan Revolving Fund (MRF) (described below), Loan Loss Reserve Fund (described below), and all notes receivable from Microloans.

SBA does not charge Intermediaries any fees for loans under this Program. An Intermediary may, however, pay minimal closing costs to third parties, such as filing and recording fees.

What is the Microloan Revolving Fund

The Microloan Revolving Fund (``MRF'') is an interest-bearing Deposit Account into which an Intermediary must deposit the proceeds from SBA loans, its contributions from non-Federal sources, and payments from its Microloan borrowers. An Intermediary may only withdraw from this account the money needed to establish the Loan Loss Reserve Fund (Sec. 120.710), proceeds for each Microloan it makes, and any payments to be made to SBA.

What is the Loan Loss Reserve Fund

(a) General. The Loan Loss Reserve Fund (``LLRF'') is an interest-bearing Deposit Account which an Intermediary must establish to pay any shortage in the MRF caused by delinquencies or losses on Microloans. An Intermediary must maintain the LLRF until it has repaid all obligations it owes SBA.(b) Level of Loan Loss Reserve Fund. Until it is in the Microloan program for at least five years, an Intermediary must maintain a balance on deposit in its LLRF equal to 15 percent of the outstanding balance of the notes receivable owed to it by its Microloan borrowers (``Portfolio'').

What conditions apply to loans by Intermediaries to Microloan Borrowers

An intermediary may make Microloans to any small business eligible to receive financial assistance under this part. A borrower may also use Microloan proceeds to establish a nonprofit child care business. Proceeds from Microloans may be used only for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment. SBA does not review Microloans for creditworthiness.

(b) Generally, Intermediaries should not make a Microloan of more than $10,000 to any borrower. An Intermediary may not make a Microloan of more than $20,000 unless the borrower demonstrates that it is unable to obtain credit elsewhere at comparable interest rates and that it has good prospects for success. An Intermediary may not make a Microloan of more than $35,000, and no borrower may owe an Intermediary more than $35,000 at any one time. Each Microloan must be repaid within six years.

(c) The maximum interest rate that can be charged a Microloan borrower is:(1) On loans of more than $10,000, the interest rate charged on the SBA loan to the Intermediary, plus 7.75 percentage points; and(2) On loans of $10,000 or less, the interest rate charged on the SBA loan to the Intermediary, plus 8.5 percentage points.

What is the Intermediary's financial contribution

The Intermediary must contribute from non-Federal sources an amount equal to 15 percent of any loan that it receives from SBA. The contribution may not be borrowed. For purposes of this program, Community Development Block Grants are considered non-Federal sources.

How does an Intermediary get a grant to assist Microloan borrowers

An Intermediary is eligible to receive grant funding from SBA of not more than 25 percent of the outstanding balance of all SBA loans to the Intermediary. The Intermediary must contribute, solely from non-Federal sources, an amount equal to 25 percent of the grant. Contributions may be made in cash or in kind. An Intermediary may not borrow its contribution. It may only use grant funds to provide Microloan borrowers with marketing, management, and technical assistance, except that:

(1) Up to 25 percent of the grant funds may be used to provide information and technical assistance to prospective Microloan borrowers; and(2) Grant monies may be used to attend training required by SBA. Intermediaries may not enter into third party contracts for the provision of technical assistance to program clients. Intermediaries which make at least 50 percent of their loans to small businesses located in or owned by residents of Economically Distressed Areas are not subject to the contribution requirement in the paragraph above.

SBA 7(a) Lender

SBA’s 7(a) Loan Program - Lender Perspective

SBA's 7(a) programs are designed to deliver the greatest amount of money to the most small businesses with the least amount of actual taxpayer expense. To accomplish this, the SBA currently offers to guaranty loans made by non-Government lenders rather than provide the loan funds itself. The money comes from the lenders. Taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender, but not to the borrower, since the borrower remains obligated for their full debt, even if they default.

Banks, savings & loans, credit unions, and other specialized lenders participate with SBA on a deferred basis to provide small business loans that are structured under 7(a) guidelines. To participate lenders must execute an SBA Form 750 Agreement. This is a deferred participation agreement that establishes the terms under which SBA will guaranty a loan submitted by the lender.

In order to participate with SBA, a lender must meet the following requirements as indicated in the Code of Federal Regulations (CFR):

1.) Have a continuing ability to evaluate, process, close, disburse, service and liquidate small business loans;

2.) Be open to the public for the making of such loans (not be a financing subsidiary, engaged primarily in financing the operations of an affiliate);

3.) Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements as Identified in 13 CFR Sec. 120.140

4.) Be supervised and examined by a State or Federal regulatory authority, satisfactory to SBA

When a lender chooses to utilize the SBA guaranty, the lender must certify that they would only make the loan if SBA provides its guaranty. The lender applies to SBA for a guaranty on a proposed loan. SBA will then make its decision whether to guaranty the loan based on the information provide in the loan application

When a lender's loan is guaranteed by SBA, certain conditions for guaranty are imposed on the lending institution. Some of these conditions are related to how the lender must close and administer the account. Other conditions pertain to the business or its owner(s) and are imposed on the borrower. The borrower agrees to these requirements as a condition for obtaining the loan.

If a guaranteed loan defaults, the lender may request SBA to purchase the guaranteed portion.To begin the relationship with SBA, a lender should contact the local SBA Office and inquire about participating with SBA.

SBA offers its participants (the lenders) a variety of methods for applying for a guaranty on their proposed loans. The differences between these methods are related to the levels of authority and responsibility the lender and SBA have in making the decisions associated with processing, closing, and administering each loan.

Lenders are given authority to take on more of the responsibilities associated with loan making and administration from SBA, based on the lenders historical experience and performance with SBA. The better a lender has conducted its analysis and performed the administration functions in the past, the more likely SBA will not have to re-analyze or check these factors in the future.

Certified Lenders ProgramPreferred Lenders ProgramLowDocumentation Program

SBAExpress ProgramCommunity Express Program

PRIME Program

Program Announcement PRIME-04-1U.S. Small Business Administration

Office of Financial AssistanceProgram for Investment in Entrepreneurs- Training and Technical Assistance

Program Announcement PRIME-04-1 solicits applications from eligible community based organizations seeking Federal Funding for the purpose of providing training and technical assistance to low-income and very-low income individuals that wish to pursue self employment. Grants awarded will generally require a 50% match. In order to ensure that funding goes to the neediest regions of the country, applications will be accepted from the following states only:

Alabama  Arizona  Arkansas  District of ColumbiaKentucky  Louisiana  Mississippi   Montana

New Mexico  New York  North Carolina   Oklahoma South Carolina   Tennessee   Texas   West Virginia

Closing Date and Time for submission of Applications: May 11, 2004

Estimated Project Start Date: Fourth Quarter, 2004

Project Duration: One year from the start date with the possibility of 4 option years

Interested parties may access Program Announcement PRIME-04-1 and application materials on or after the opening date of March 23, 2004 at the following website: http://www.sba.gov/financing/sbapartner/04-1.pdf

Questions concerning the technical aspects of this program announcement should be directed to Jody Raskind at (202)205-6497. Questions concerning the budget or financial aspects of this program announcement should be directed to Adrienne Dinkins at 202-205-7140.

 

 

Program Announcement PRIME-04-2U.S. Small Business Administration

Office of Financial AssistanceProgram for Investment in Entrepreneurs- Capacity Building

Program Announcement PRIME-04-2 solicits applications from eligible organizations seeking Federal Funding for the purpose of providing capacity building services to community based organized occupied with the provision of training and technical assistance to low-income and very-low income individuals that wish to pursue self employment. Grants awarded will generally require a 50% match. In order to ensure that capacity building services are provided to organizations serving the neediest regions of the country, applications will be accepted only from organizations with the capacity to provide services in the following states:

Alabama  Arizona   Arkansas  District of ColumbiaKentucky  Louisiana  Mississippi  Montana

New Mexico  New York  North Carolina   Oklahoma

South Carolina  Tennessee  Texas  West Virginia

Closing Date and Time for submission of Applications: May 11, 2004

Estimated Project Start Date: Fourth Quarter, 2004

Project Duration: One year from the start date with the possibility of 4 option years

Interested parties may access Program Announcement PRIME-04-2 and application materials on or after the opening date of March 23, 2004 at the following website: http://www.sba.gov/financing/sbapartner/04-2.pdf

Questions concerning the technical aspects of this program announcement should be directed to Jody Raskind at (202)205-6497. Questions concerning the budget or financial aspects of this program announcement should be directed to Adrienne Dinkins at 202-205-7140.

Finally, you may want to go to the SBA website to check out some of the information listed under “Special Interests” in the Financing section. There you will find many business publications and resources.