The availability of SBA loans has helped countless entrepreneurs since the agency's inception during the Eisenhower Administration. In fact, the U.S. Small Business Administration has processed more than 20 million loans since 1953. The agency does not lend on its own; rather, the SBA guarantees a portion of the loan, which makes it more advantageous for lenders to provide funding to small companies that might fall into a higher risk category. These companies frequently are not in a strong enough financial position to obtain traditional bank loans.
Since the government backs the loans, there is much incentive for smaller banks to process and approve small business funding for start-ups and expanding companies. Small business lending via SBA loans is important for community and regional banks, which face increased competition from larger banks and non-bank lenders, including Amazon, which has gotten into the market. Meanwhile, SBA loans are incredibly valuable for borrowers who might not otherwise be able to secure funding at reasonable rates and terms.
Aspiring entrepreneurs, including women, minorities, and veterans, are taking advantage of the SBA's 7(a), CDC/504, Microloan and Community Advantage loan programs in record numbers. In 2016, the SBA approved more than 70,000 loans totaling $28.9 billion largely through the popular 7(a) and 504 loan programs, according to the agency's Fiscal Year 2016 filing. These loan programs help create and support nearly 700,000 jobs nationwide.
The agency's flagship 7(a) lending program (for loans between $150,000 and $5 million) enables borrowers to use SBA-backed loans to establish a new business or to assist in the acquisition, operation, or expansion of an existing business. Specific fees, interest rates and terms of the loan are negotiated between the borrower and an SBA-approved lender (often a community or regional bank).
SBA 7(a) loans offer lower down payments and longer term financing, which can help businesses just starting out -- and those looking to expand -- to better manage their cash flow. This allows small business owners to focus on operational expenses rather than debt repayment. SBA 7(a) loans require submission of the last three years of business tax returns and two years of personal tax returns on all principals having more than 20 % stake.
SBA Express Loans are a good source of long-term financing for working capital needs. The age of business needs to be greater than 18 months, and owners must be either U.S. citizens or Green card holders. SBA Express loans in amounts up to $350,000 can be used for financing working capital needs or for buying equipment. Loans of $100,000 or less do not require any proof of income. However, loans above $100,000 require last two years of business and personal tax returns from principals having more than 20% stake in the company.
SBA CDC/504 financing is a long-term fixed rate product used to finance assets such as real estate or equipment. The small business borrower must occupy at least 51% of the real estate asset and cannot have sales over $6 million or employ more than 500 employees. Typical rates are around prime minus 1 on fixed rates. To be considered for a Certified Development Company/504 loan, applicants must meet certain eligibility requirements.
The SBA's Community Advantage loan program is designed to meet the credit, management, and technical assistance needs of small businesses in under-served markets. The program provides mission-based lenders, such as the Empire State Certified Development Corporation, access to 7(a) loan guaranties as high as 85% for loans up to $250,000. Although a borrower must prove credit worthiness and the viability of the business, unlike traditional lending, qualification for this program is not limited by the size of the borrower's balance sheet or the amount of collateral involved. The program ultimately broadens access to affordable credit for companies that might not otherwise be able to obtain funding.
The SBA's Microloan program provides loans up to $50,000 to help small businesses start up and expand. The average microloan is about $13,000. Microloans can be used for working capital, inventory or supplies, furniture or machinery/equipment. An SBA microloan cannot be used to pay existing debts or to purchase real estate.
SBA funding strengthens small businesses, which are a major engine of job creation and economic growth. Additionally, the SBA advocates on behalf of small businesses to help them gain access to the nearly $100 billion of federal contracts. The agency also provides mentoring and training programs through a national network of more than 14,000 partners including Small Business Development Centers (SBDCs), Women's Business Centers, Veteran Business Centers and SCORE (Service Corps of Retired Executives). Importantly, when disasters such as Hurricane Harvey occur, the agency offers assistance, including disaster loans, to small business owners trying to get back on their feet.