Minority Business Start Up Loan
Minority Business Start Up Loan
The Small Business Administration ( SBA ) is a United States government agency that provides support to small businesses.
The mission of the Small Business Administration is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters."
The SBA does not make loans directly to small businesses but does help to educate and prepare the business owner to apply for a loan through a financial institution or bank. The SBA then acts as a guarantor on the bank loan. In some circumstances it also helps to procure loans to victims of natural disasters, works to get government procurement contracts for small businesses, and assists businesses with management, technical and training issues.
The SBA has directly or indirectly helped nearly 20 million businesses and in 2008 had a loan portfolio of roughly 219,000 loans worth more than $84 billion making it the largest single financial backer of businesses in the United States.
History
The SBA was established on July 30, 1953, by the United States Congress with the passage of the Small Business Act. Its function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Also stipulated was that the SBA should ensure a "fair proportion" of government contracts and sales of surplus property to small business. This was accomplished primarily through the Small Business Innovative Research program and government "set-asides."
The SBA has survived a number of threats to its existence. In 1996 the then newly Republican-controlled House of Representatives planned to eliminate the agency. It survived and went on to receive a record high budget in 2000. Renewed efforts by the Bush Administration to end the SBA loan program have met congressional resistance, although the SBA's budget has been repeatedly cut, and in 2004 certain expenditures were frozen.
Organizational structure
The SBA has an associate administrator for the following offices:
- Communications and Public Liaison
- Congressional and Legislative Affairs
- Disaster Assistance
- Entrepreneurial Development
- Equal Employment Opportunity and Civil Rights Compliance
- Field Operations
- Government Contracting and Business Development
- Hearings and Appeals
- Inspector General
- International Trade
- Investment
- Management and Administration
- Minority Enterprise Development
- Native American Affairs
- Size Standards
- Small Business Development Centers
- Surety Guarantees
- Technology
- Veterans Affairs
- Women's Business Ownership
SBA loan programs
The most visible elements of the SBA are the loan programs it administers. The SBA itself does not grant loans with the exception of Disaster Relief Loans. Instead, the SBA guarantees against default certain portions of business loans made by banks and other lenders that conform to its guidelines. Disaster Relief Loans are issued directly from the SBA.
Contrary to popular belief, these programs are not generally for persons with bad credit who can't get bank loans, nor are they primarily used for startup funding; rather, the primary use of the programs is to make loans for longer repayment periods and with looser affordability requirements than normal commercial business loans. Also, a business can qualify for the loan even if the yearly payment would be the same as the previous year's profit, whereas most banks would want payment for a loan to be no more than two-thirds (2/3) of the prior year's profits for a business. The lower payments, longer terms and looser affordability calculations allow some businesses to borrow more money than they could otherwise.
One of the most popular uses of SBA loans is for commercial mortgages on buildings occupied or to be occupied by a small business. These programs are beneficial to the small business because most bank programs frequently require larger down payments and/or have shorter terms requiring borrowers to refinance every five years. They can be beneficial to the bank in that the bank can reduce its risk by taking a first lien position for a smaller percentage of the entire project and then arranging for a SBA Certified Development Company to finance the remainder through a second lien position.
Types of Guaranteed Business Loans through banking institutions include:
- Loan Guarantee Program: The 7(a) Loan Guarantee Program is designed to help small entrepreneurs start or expand their businesses. The program makes capital available to small businesses through bank and non-bank lending institutions.
- 504 Fixed Asset Financing Program: The 504 Fixed Asset Financing Program is administered through non-profit Certified Development Companies throughout the country. This program provides funding for the purchase or construction of real estate and/or the purchase of business equipment/machinery. Of the total project costs, a lender must provide 50% of the financing, a Certified Development Company provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides approximately 10% of the financing. Aggressive vetting of any property purchased through this program is required. Specific SBA Phase I Environmental Site Assessment guidelines apply as all properties are treated as "high risk."
- MicroLoan Program: Available for up to $35,000 through non-profit, micro loan intermediaries, to small businesses considered unbankable in the traditional banking industry.
- Economic Development Program: SBA partners such as SCORE and the Small Business Development Centers (SBDCs), operating in each state, provide free and confidential counseling and low-cost training to small businesses.
- 8(a) Business Development Program: Assists in the development of small businesses owned and operated by individuals who are socially and economically disadvantaged.
Homeowners are eligible for long-term, low-interest loans to rebuild or repair a damaged property to pre-disaster condition. Before making a loan, the SBA must establish the cost of repairing or rebuilding the structure (which is determined by SBA's Field Inspectors who visit the property), the applicant's repayment ability (determined by applicant's creditworthiness and income) and whether the applicant can obtain credit in the commercial market (called the credit elsewhere test). Applicants who do not qualify for disaster assistance loans may be referred to the Federal Emergency Management Agency (FEMA) for grants. Although SBA won’t decline a loan for lack of collateral, the agency is statutorily required to ask for whatever collateral is available including the damaged property, a second home or other real estate.
Businesses are also eligible for long-term, low-interest loans to recover from declared disasters. Similar to the homeowner's loan program mentioned above, a small business owner must pledge any available assets and acquire a similar pledge from a spouse or partner in the case of any shared assets. If defaulted on the loan, the spouse or partner must surrender their value in the assets. The total value of an applicant’s assets is not considered by the SBA; therefore, a company may be approved for a loan regardless of whether that person has little or great net worth.
Once an SBA loan is approved, the SBA mails closing documents to the applicant for signature. Disbursements include an initial unsecured amount of $14,000, and subsequent disbursements depending upon construction progress and continued insurance coverage. After final disbursement, the loan is transferred to one of the SBA's servicing offices for management, or to its collections office in the case of default.
Disaster Relief Loans are often approved within 21 days.
If a business which has a current Disaster Relief Loan defaults on the loan and the business is closed, the SBA will pursue the business owner to liquidate all personal assets. The IRS will withhold any tax refund expected by the former business owner and apply the amount toward the loan balance.
SBA loan industry
The SBA loan industry can be divided into distinct categories:
- The largest United States Banks, such as Bank of America and Wells Fargo, generate the bulk of their SBA loan volume by the loans, especially the express loan and line of credit, being offered to those who would be declined for a normal bank loan due to factors such as length of time in business or slightly stricter affordability factors. These banks have sophisticated computer systems that generally makes this process seamless, and are quite different from other financial institutions who utilize SBA lending for separate and distinct purposes
- SBA loans are used heavily by banks of all sizes to finance the purchase or construction of business owner occupied real estate (ie. real estate purchased by a business). Many banks only offer SBA loans for this purpose. In particular, they are using to finance properties that the bank would consider too risky to finance on their own, due to them being of a special or environmentally risky nature that can make their resale value limited; these properties include Motels, Gas Stations, and Car Washes.
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SBA loans are also used to allow individuals to buy existing businesses. Since, unlike in real estate transactions, commercial lenders are allowed to pay
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