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W W W. M A I N E B I Z . B I Z 45 FA C T BO O K / D O I N G B U S I N E S S I N M A I N E B U S I N E S S R E S O U R C E S S BA loan guaranty programs pro- vide financing for small businesses that have potential but cannot qualify for credit by themselves. e SBA doesn't provide the loan, but guaran- ties a portion of the loan provided by a lender (except for microloans). e lender decides after the business applies whether an SBA guaranty is needed. Basic 7(a) Loan program is is the SBA's most frequently used non-disaster financial assistance program because of its flexibility in loan structure, variety of uses for the proceeds and availability. e loans are funded by SBA- approved lenders; the guaranty that the SBA provides reduces the lender's risk. If the borrower defaults, the lender can request SBA pay the guaranteed por- tion of the debt, with the borrower still obligated for the full amount. To qualify, a business must meet the lender's criteria and 7(a) program requirements, and the lender must certify that it would not provide the loan under the proposed terms and conditions without an SBA guaranty. To get the guaranty, the applicant must be eligible and creditworthy and the loan structured under conditions acceptable to the SBA. Percentage of guarantees and loan maximums SBA only guarantees a portion of a 7(a) loan; each loan has an SBA share and an unguarantied portion. e percent- age of guaranty depends on either the dollar amount or the lender's program. For loans of $150,000 or less, the SBA generally guarantees as much as 85%; for loans over $150,000, up to 75%. e maximum amount of a single 7(a) loan is $5 million. ere is no minimum. e maximum SBA share that can be provided to one business (including affiliates) is $3,750,000. Interest rates e interest rate is negotiated between the applicant and lender, but is subject to SBA maximums. e maximum rate comprises a base rate and an allow- able spread. ere are three acceptable base rates (Wall Street Journal Prime 1 , London Interbank One Month Prime plus 3 percent, and an SBA Peg Rate). Lenders may add an additional spread to the base rate to arrive at the final rate. Guaranty and other fees Loans guaranteed by the SBA are assessed a fee based on the loan's matu- rity and the dollar amount guaranteed, not the total loan amount. e guaranty fee is initially paid by the lender and passed on to the borrower at closing. 7(a) Loan maturities e SBA's loan programs are intended to encourage longer-term financing, but maturities are based on the ability to repay, the purpose of the loan and the useful life of the assets financed. Maturity generally ranges from 7 to 10 years for working capital, business start-ups and business acquisition loans, and up to 25 years if the purpose is to acquire real estate or fixed assets with a long-term useful life. Loan structure Repayment has to be set up so the loan is paid in full by maturity. Over the term of the loan there can be additional payments or payment relaxation depending on what is hap- pening with the business. Balloon payments and call provisions are not allowed on a 7(a) term loan. Collateral e SBA expects 7(a) loans to be secured with assets acquired with the loan proceeds as well as business and personal assets, depending upon the loan amount and the way the lender requests the guaranty. SBA will not decline a request to guaranty if the only unfavorable factor is insufficient collateral provided all available col- lateral is offered. Size eligibility For a more in-depth listing of standards, visit www.sba.gov/size Eligibility is based size and nature of the business, use of proceeds and case- specific factors. Loan recipient businesses must be classified as small by the SBA. In general: Manufacturing: 500 to 1,500 employees Wholesale trades: Up to 100 employees Services: $2 million to $35.5 mil- lion in average annual receipts Retail trades: $7 million to $35.5 million in average annual receipts Construction: $7 million to $33.5 million in average annual receipts Agriculture, forestry, fishing and hunting: $750,000 to $17.5 million in average annual receipts Businesses that do not qualify under their industry size standards for SBA funding can't have a tangible net worth exceeding $15 million and aver- age net income exceeding $5 million for the previous two years, including affiliates. is makes more businesses eligible and applies to SBA non- disaster loan programs. Nature of business e SBA has prohibitions against providing financial assistance to busi- nesses involved in lending, speculat- ing, passive investment, pyramid sales, loan packaging, presenting live perfor- mances of a prurient nature, gambling and illegal activity. e SBA also cannot make loan guaranties to nonprofit businesses, pri- vate clubs that limit membership on a basis other than capacity, businesses that promote a religion, businesses owned by individuals incarcerated or on probation or parole, municipalities, and businesses or their owners that failed to repay a fed- eral loan or federally assisted financing, or are delinquent on federal debt. Use of proceeds 7(a) loan proceeds can be used to buy machinery, equipment, fixtures, supplies, and to make improvements to land and/ or buildings that will be occupied by the business. Proceeds can also be used to: expand or renovate acquire machinery, equipment, furniture, fixtures and leasehold improvements acquire businesses start businesses acquire land and build a location for the applicant business refinance existing debt under cer- tain conditions as permanent working capital SBA 7(a) loan proceeds cannot be used: to make investments to provide money to owners, except for ordinary compensation for services provided for floor plan financing for a purpose that does not benefit the business Miscellaneous factors ere are also a variety of requirements, including checking the personal resources of the owners to see if they can make a contribution before getting a loan guar- anty, as well as the SBA's anti-discrim- ination rules. SBA also has limitations on lending to agricultural enterprises because there are other federal agencies with programs to fund such businesses. Generally: Every loan must be for a sound business purpose. ere must be sufficient invested equity in the business so it can operate on a sound financial basis. ere must be a potential for long- term success. e owners must be of good char- acter and reputation. All loans must be sound enough to reasonably assure repayment. Company loan programs (504 Loans) e 504 Loan program provides long- term, fixed-rate, subordinate mortgage financing for acquisition and/or renova- tion of capital assets, including land, buildings and equipment. Some refinanc- ing is also permitted. Most for-profit small businesses are eligible. e types of businesses excluded from 7(a) loans are also excluded from the 504 program. e SBA's 504 Certified Develop- ment Companies finance business expansion needs. CDCs work with banks and other lenders to make loans on reasonable terms, helping lenders retain growing customers and provide Community Reinvestment Act credit. SBA business loans 1 All references to the prime rate refer to the base rate in effect on the first business day of the month the loan application is received by the SBA.