Part 1

7(a) Loan Guaranty Program

GENERAL DESCRIPTION

The 7(a) Loan Guaranty Program is one of SBA's primary lending programs. It provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private sector lenders that provide loans that are, in turn, guaranteed by the SBA—the Agency has no funds for direct lending or grants.

Most lenders are familiar with SBA loan programs, so interested applicants should contact their local lender for further information and assistance in the SBA loan application process. Information on SBA loan programs, as well as the management counseling and training services offered by the Agency, is also available from your local SBA office.

LOAN AMOUNTS AVAILABLE UNDER SBA LOAN PROGRAMS

For most SBA loans, there is no legislated limit to the total amount of the loan that may be requested from the lender. However, the maximum amount the SBA can guarantee is generally $750,000. Thus, with a lender requesting the maximum SBA guaranty of 75 percent, the total loan amount available under this program generally would be limited to $1 million. However, there are some exceptions as presented below in the discussion of specialized loan programs.

What SBA Seeks in a Loan Application 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 twenty percent (20%) or more are required to personally guarantee SBA loans.

Who is Eligible for an SBA Loan?

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 Business
• Size of Business
• Use of Loan
• Funds Special Circumstances

Types of Businesses Eligible

five star hotel in FunchalThe vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest and use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance.

Size of Businesses Eligible

The Small Business Act defines an eligible small business as one that is independently owned/operated and not dominant in its field of operation. The Act also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences. The SBA has therefore developed size standards that define the maximum size of an eligible small business.

As apparent from the following general description of SBA's size standards, most businesses are considered small. However, these represent general definitions that in some cases are further defined by specific SIC code.

Industry Size

• Retail and Service $3.5 to $13.5 million
• Construction $7.0 to $17.0 million
• Agriculture $0.5 to $3.5 million
• Wholesale No more than 100 employees
• Manufacturing 500 to 1,500 employees

If a potential borrower is close to these standards, size eligibility should be discussed with the local SBA office. Also note that the standards for a particular business may change from time to time and some exceptions do apply.

When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.

Use of Loans

The proceeds of SBA loans can be used for most business purposes. These may include the purchase of real estate to house the business operation; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory and working capital.

Proceeds of an SBA loan cannot be used:

• to finance floor plan needs,
• to purchase real estate where the participant has issued a forward commitment to the builder/developer or where the real estate will be held primarily for investment purposes,
• to make payments to owners or pay delinquent withholding taxes, or
• to pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management. (Proceeds can never be used to reduce the exposure of the participant in the loans being refinanced.)

Special Circumstances

Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.

• Franchises
• Recreational Facilities and Clubs
• Farms and Agriculture
• Fishing Vessels
• Medical Facilities
• Alter Ego
• Change of Ownership
• Aliens
• Probation or Parole
• Academic Schools

Franchises - are eligible except in situations where a franchiser retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.

Recreational Facilities and Clubs - are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.

Farms and Agricultural Businesses - are eligible; however, these applicants should first explore Farmers Home Administration (FmHA) programs, particularly if the applicant has a prior or existing relationship with FmHA.

Fishing Vessels - are eligible; however, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.

Medical Facilities - hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they are licensed by the appropriate government agency and services rendered go beyond those of room and board.

Alter Ego - while investment in real estate occupied by anyone other than the small business concern is not eligible, a holding company owned by the same parties and in the same proportion as the small business (alter ego) may be eligible if a number of conditions are met.

A holding company may be eligible if:

• the applicant holding company is a small business concern organized and operated for profit and in the business of owning and leasing real or personal property to the operating company;
• the operating concern fits eligibility criteria of size, type, use of proceeds, and special circumstances;
• loan proceeds are used only for acquisition, improvement, and eligible refinancing of real or personal business property;
• principals with ownership interest in the applicant holding company are identical with and in the same proportion as the ownership interest in the holding operating company. An exception may be granted where this is not the case solely because one or more immediate members of the same family have variant interests. The identity of interests, generally, must remain throughout the life of the loan. (Consult with the local office when family members hold different interests in the holding and operating companies);
• an assignment of the lease between the holding company and the operating company with a term (including options to renew) at least as long as the term of the loan is required in addition to the normal collateral; the operating company either cosigns or guarantees the loan.

NOTE: alter ego financing applies only to fixed asset purposes;
any working capital needs must be financed separately.

Change of Ownership - Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.

Aliens - are eligible; however, consideration is given to the type of status possessed, e.g., resident, lawful temporary resident, etc. in determining the degree of risk relating to the continuity of the applicant's business. Excessive risk may be offset by full collateralization. The various types of visas may be discussed in more detail with the local SBA office.

Probation or Parole - applications will not be accepted from firms where a principal (any one of those required to submit a personal history statement (SBA Form 912):

• is currently incarcerated, on parole, or on probation;
• is a defendant in a criminal proceeding; or
• whose probation or parole is lifted expressly because it prohibits an SBA loan.

This restriction would not necessarily preclude a loan to a business, where a principal had responded in the affirmative to any one of the questions on the Statement of Personal History. These judgments are made on a case-by-case evaluation of the nature, frequency, and timing of the offenses. Fingerprint cards (available from the local SBA office) are required any time a question on the form is answered in the affirmative.

Ineligible Businesses

Businesses cannot be engaged in illegal activities, loan packaging, speculation, multi sales distribution, gambling, investment or lending or where the owner is on parole.

Specific types of businesses not eligible include:

• Real Estate Investment and other Speculative Activities
• Lending Activities Pyramid
• Sales Plans Illegal Activities
• Gambling Activities
• Charitable, Religious, or Certain Other Nonprofit Institutions

Real Estate Investment - firms exist when the real property will be held for investment purposes - as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired.

Other Speculative Activities - are those firms developing profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business. Dealers of rare coins and stamps are not eligible.

Lending Activities - include banks, finance companies, factors, leasing companies, insurance companies (not agents) and any other firm whose stock in trade is money.

Pyramid Sales Plans - are characterized by endless chains of distributors and sub-distributors where a participant's primary incentive is based on the sales made by an ever- increasing number of participants. Such products as cosmetics, household goods, and other soft goods lend themselves to this type of business.

Illegal Activities - are by definition those activities that are against the law in the jurisdiction where the business is located. Included in these activities are the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that permits illegal prostitution.

Gambling Activities - include any business whose principal activity is gambling. While this precludes loans to race tracks, casinos, and similar enterprises, the rule does not restrict loans to otherwise eligible businesses, which obtain less than one-third of their annual gross income from either: 1) the sale of official state lottery tickets under a state license, or 2) legal gambling activities licensed and supervised by a state authority.

Charitable, Religious, or other Non-Profit - or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives and churches and organizations promoting religious objectives are not eligible.

SBA Loan Maturities

SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)

Interest Rates Applicable to SBA Loans

Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate.

Interest rates may be fixed or variable. Fixed rate loans must not exceed Prime Plus two and one-quarter percent (2.25%) if the maturity is less than seven (7) years, and Prime Plus two and three-quarters percent (2.75%) if the maturity is seven (7) years or more. For loans of less than $25,000, the maximum interest rate must not exceed Prime Plus four and one-quarter percent (4.25%) and four and three-quarters percent (4.75%), respectively; for loans between $25,000 and $50.000, maximum rates must not exceed three and one-quarter percent (3.25%) and three and three-quarters percent (3.75%), respectively.

Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the "Federal Register." The lender and the borrower negotiate the amount of the spread that will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must be no more often than monthly and must be consistent, (e.g., monthly, quarterly, semiannually, annually or any other defined, consistent period).

Fees Associated with SBA Loans

To offset the costs of the SBA's loan programs to the taxpayer, the Agency charges lenders a guaranty and a servicing fee for each loan approved. These fees can be passed on to the borrower once they have been paid by the lender. The amount of the fees are determined by the amount of the loan guaranty.

When the guaranty portion of the loan is $80,000 or less, the guaranty fee will be two (2) percent of the guaranteed portion; for loans more than $80,000 but less than $250,000, a three (3) percent guaranty fee will be charged; for the next $250,000 of the guaranteed portion, a 3.5 percent guaranty fee will be charged; for any portion greater than $500,000, a 3.875 percent guaranty fee will be charged. In addition, all loans will be subject to a fifty basis point (0.5%) annualized servicing fee, which is applied to the outstanding balance of SBA's guaranteed portion of the loan.

Prohibited Fees

Processing fees, origination fees, application fees, points, brokerage fees, bonus points, and other fees that could be charged to an SBA loan applicant are prohibited. The only time a commitment fee may be charged is for a loan made under the Export Working Capital Loan Program.

Guaranty Percents

For those applicants that meet the SBA's credit and eligibility standards, the Agency can guarantee up to eighty (80%) percent of loans of $100,000 and less, and up to seventy-five (75%) percent of loans above $100,000 (generally up to a maximum guaranty amount of $750,000).

THE NEW SBA LOWDOC

How It Works

Once a small business borrower meets the lender's requirements for credit, the lender may request a LowDoc guaranty from the SBA. It's a quick, two-step process:

• The borrower completes the front of the SBA's one-page application, and the lender completes the back.
• The lender submits a complete application to the SBA and receives an answer within 36 hours.

The New SBALowDoc allows lenders to take advantage of electronic loan processing

Interest Rates

Interest rates can be negotiated between the borrower and lender, may be fixed or variable, are tied to the prime rate (as published in the Wall Street Journal) and may not exceed the following SBA maximums:

• 2.25 percent over prime for loans of less than seven years, and
• 2.75 percent over prime for loans of seven years or longer. Loans under $50,000 may be subject to slightly higher rates.

Collateral

To secure the loan, the borrower must pledge available assets; generally, loans are not declined when inadequate collateral is the only unfavorable factor. Personal guaranties of the principals are required.

Maturity

Length of time for repayment depends on the ability to repay and the use of the loan proceeds. Maturity generally is five to 10 years. For fixed-asset loans it can be up to 25 years.

Eligibility

A business is generally eligible for the New SBALowDoc if:

• the purpose of the loan is to start or grow a business; the existing business has average annual sales for the preceding three years not exceeding $5 million, and
• the business employs no more than 100 people, including affiliates; the business and its owners have good credit and the business owners are of good character.

Old Pilot versus New Pilot

For more Information

• The SBA has offices located throughout the United States. For the one nearest you, look under "US Government" in your telephone directory, or call the SBA Answer Desk at 1-800-U-ASK-SBA. To send a fax to the SBA, dial 202-205-7064. For the hearing impaired, the TDD number is 704-344-6640. For information on your rights to regulatory fairness, the telephone number is 1-800-REG-FAIR.

  To access the agency's electronic public information services, you may contact:

  SBA Online: Electronic Bulletin Board - modem and computer required 1-800-697-4636 (limited access) 1-900-463-4636 (full access) 202-401-9600 (D.C. metro area)

• US Business Advisor: www.business.gov
• For a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, call your local SBA office or the SBA Answer Desk.
• All of the SBA's programs and services are provided to the public on a nondiscriminatory basis.

MICROLOAN PROGRAM

The MicroLoan Program was developed to increase the availability of very small loans to prospective small business borrowers. Under this program, the SBA makes funds available to nonprofit intermediaries, who in turn make loans to eligible borrowers in amounts that range from under $100 to a maximum of $25,000. The average loan size is $10,000. Completed applications can usually be processed by the intermediary.

Terms, Interest Rates and Fees

Under the Microloan Program, the maximum loan amount is $25,000. The average is around $10,000. The maximum term allowed for a loan 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. Rates are generally competitive.

Collateral

Each non-profit lending organization has its own loan requirements, but must take as collateral any assets bought with the microloan. In most cases, the personal guaranties of the business owners are also required.

SBAEXPRESS

How It Works

Lenders participating in SBAExpress can:

• use their own forms and processes to approve loans in amounts up to $150,000;
• provide minimal paperwork to the SBA to obtain a 50 percent guaranty on the loan; and
• take most servicing actions without prior approval by the SBA.

Lender Participation

You may be eligible to become an SBAExpress lender if :

• you are currently in the SBA's Preferred Lenders Program or, in selected geographic regions, participate in the SBA's 7(a) Lending Program; and
• you meet other participation and loan portfolio standards.

Contact your SBA district office to find out if you are eligible or if you need more information.

Collateral

The SBA's general policy requires guaranteed loans to be fully secured. With SBAExpress, lenders may approve unsecured lines of credit up to $25,000.

Maturity

Loan maturity generally is 5 to 10 years, and up to 25 years for fixed-asset loans. Length of time for repayment depends on the borrower's ability to repay and the use of the loan proceeds.

Interest Rates

Lenders and borrowers can negotiate the interest rate. Rates are tied to the prime rate (as published in the Wall Street Journal) and may be fixed or variable, but they may not exceed SBA maximums:

• 2.25 percent over prime, for loans of less than seven years, and
• 2.75 percent over prime, for loans of seven years or longer.
• Loans under $50,000 may be subject to slightly higher rates.

Maximum Loan Amount

The maximum loan amount for SBAExpress is $150,000.

Small Business Eligibility

SBAExpress loans help small businesses start, build or grow. To qualify for the program, a business must meet the SBA's size standards. These standards are based on the average number of employees over the preceding 12 months or the average sales over the previous three years. The agency publishes size standards for specific standard industrial classification (SIC)codes:

• Manufacturing - from 500 to 1,500 employees
• Wholesaling - 100 employees Services - from $2.5 million to $21.5 million in annual receipts
• Retailing - from $5 million to $21 million in annual receipts
• General Construction - from $13.3 million to $17 million in annual receipts

For More Information

The SBA has offices located throughout the United States. For the one nearest you, look under "US Government" in your telephone directory, or call the SBA Answer Desk at 1-800-U-ASK-SBA. To send a fax to the SBA, dial 202-205-7064. For the hearing impaired, the TDD number is 704-344-6640. For information on your rights to regulatory fairness, the telephone number is 1-800-REG-FAIR.

To access the agency's electronic public information services, you may contact:

• SBA Online: electronic bulletin board - modem and computer required.
• 1-800-697-4636 (limited access)
• 1-900-463-4636 (full access)
• 202-401-9600 (D.C. metro area)
• Internet: using uniform resource locators (URLs)
• SBA Home Page: www.sba.gov SBA gopher: gopher.sba.gov
• File transfer protocol: ftp.sba.gov
• Telnet: telnet.sba.gov
• U.S. Business Advisor: www.business.gov
• For a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, call your local SBA office or the SBA Answer Desk.
• All of the SBA's programs and services are provided to the public on a nondiscriminatory basis.

General Information about the 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 can be for any dollar amount (except for the Small Asset-Based Line described below).

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 Amount of CAPLines Loan

For most SBA loans there is no legislated limit to the total amount of the loan that may be requested from the lender. However, the maximum amount the SBA can guaranty is generally $750,000. Thus, with a lender requesting the maximum SBA guaranty of 75 percent, the total loan amount available under this program generally would be limited to $1 million. However, there are some exceptions as presented below in the discussion of specialized loan programs.

Who is Eligible for an SBA Loan

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 Business
• Size of Business
• Use of Loan Funds
• Special Circumstances

TYPE OF BUSINESSES ELIGIBLE:

The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance.

SIZE OF BUSINESSES ELIGIBLE:

The Small Business Act defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. The Act also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences. The SBA has therefore developed size standards and SIC Codes that define the maximum size of an eligible small business.

As apparent from the following general description of SBA's size standards, businesses are considered small. However, these represent general definitions that in some cases are further defined by specific SIC code.

• Industry Size
• Retail and Service $3.5 to $13.5 million
• Construction $7.0 to $17.0 million
• Agriculture $0.5 to $3.5 million
• Wholesale No more than 100 employees
• Manufacturing 500 to 1,500 employees

If a potential borrower is close to these standards, size eligibility should be discussed with the local SBA office. Also note that the standards for a particular business may change from time to time and some exceptions do apply.

When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.

USE OF LOANS:

The proceeds of SBA loans can be used for most business purposes. These may include the purchase of real estate to house the business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory; and, working capital.

PROCEEDS OF AN SBA LOAN CANNOT BE USED:

• to finance floor plan needs;
• to purchase real estate where the participant has issued a forward commitment to the builder/developer, or where the real estate will be held primarily for investment purposes;
• to make payments to owners or pay delinquent withholding taxes;
• to pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management. (Proceeds can never be used to reduce the exposure of the participant in the loans being refinanced.)

SPECIAL CIRCUMSTANCES:

Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.

Franchises Recreational Facilities and Clubs Farms and Agriculture Fishing Vessels Medical Facilities Alter Ego Change of Ownership Aliens Probation or Parole

FRANCHISES - are eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.

RECREATIONAL FACILITIES AND CLUBS - are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.

FARMS AND AGRICULTURAL BUSINESSES - are eligible; however, these applicants should first explore Farmers Home Administration (FmHA) programs, particularly if the applicant has a prior or existing relationship with FmHA.

FISHING VESSELS - are eligible; however, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.

MEDICAL FACILITIES - hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they are licensed by the appropriate government agency and services rendered go beyond those of room and board.

ALTER EGO- while investment in real estate occupied by anyone other than the small business concern is not eligible, a holding company owned by the same parties and in the same proportion as the small business (alter ego) may be eligible if a number of conditions are met.

A holding company may be eligible if:

• the applicant holding company is a small business concern organized and operated for profit and in the business of owning and leasing real or personal property to the operating company;
• the operating concern fits eligibility criteria of size, type, use of proceeds, and special circumstances;
• loan proceeds are used only for acquisition, improvement, and eligible refinancing of real or personal business property;
• principals with ownership interest in the applicant holding company are identical with and in the same proportion as the ownership interest in the holding operating company. An exception may be granted where this is not the case solely because one or more immediate members of the same family have variant interests. The identity of interests, generally, must remain throughout the life of the loan. (Consult with the local office when family members hold different interests in the holding and operating companies);
• an assignment of the lease between the holding company and the operating company with a term (including options to renew) at least as long as the term of the loan is required in addition to the normal collateral;
• the operating company either co-signs or guarantees the loan.

NOTE: Alter ego financing applies only to fixed asset purposes; any working capital needs must be financed separately.

CHANGE OF OWNERSHIP - Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.

ALIENS - are eligible; however, consideration is given to the type of status possessed, e.g., resident, lawful temporary resident, etc. in determining the degree of risk relating to the continuity of the applicant's business. Excessive risk may be offset by full collateralization. The various types of visas may be discussed in more detail with the local SBA office.

PROBATION OR PAROLE - applications will not be accepted from firms where a principal (any one of those required to submit a personal history statement, SBA Form 912):

1) is currently incarcerated, on parole, or on probation;
2) is a defendant in a criminal proceeding; or
3) whose probation or parole is lifted expressly because it prohibits an SBA loan.

This restriction would not necessarily preclude a loan to a business, where a principal had responded in the affirmative to any one of the questions on the Statement of Personal History. These judgments are made on a case by case evaluation of the nature, frequency, and timing of the offenses. Fingerprint cards (available from the local SBA office) are required any time a question on the form is answered in the affirmative.

CAPLines 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 Rates Applicable To CAPLines Loans

• Negotiated with the lender, the interest rate can be up to 2.25 percent over the prime rate.
• Fees Associated With CAPLines Loans and Prohibited Fees
• The guaranty fee is the same as for any standard 7(a) loan. The SBA places no fee restrictions on the lender for the standard asset-based line but will require full disclosure to ensure that fees are reasonable. On all other CAPLines, the annual fee is restricted to two (2) percent based on the outstanding balance.

CAPLines Loan Program

Percent

For those applicants that meet the SBA's credit and eligibility standards, the Agency can guarantee up to eighty (80%) percent of loans of $100,000 and less, and up to seventy-five (75%) percent of loans above $100,000 (generally up to a maximum guarantee amount of $750,000).

Loan Program

buchen WroclawCollateral 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.

Certified Development Company (504) Loan Program

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 or region. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 290 CDCs nationwide. Each CDC covers a specific 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 (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. The maximum SBA debenture generally is 750,000 (up to $1 million in some cases). The program is designed to enable small businesses to create and retain jobs; the CDC's portfolio must create or retain one job for every $35,000 provided by the SBA.

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:

Interest 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 generally 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 $6 million and does not have an average net income in excess of $2 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

US COMMUNITY ADJUSTMENT AND INVESTMENT PROGRAM (CAIP)

GENERAL DESCRIPTION

The United States Community Adjustment and Investment Program was created to help communities that suffered job losses due to changing trade patterns with Mexico and Canada following the North American Free Trade Agreement (NAFTA). The CAIP promotes economic implementation of the adjustment by increasing the availability and flow of credit and encourages business development and expansion in impacted areas. Through the CAIP, credit is available to businesses in eligible communities to create new, sustainable jobs or to preserve existing jobs.

A loan program designed to provide financing to designated communities negatively impacted by changing trade patterns resulting from the North American Free Trade Agreement (NAFTA).

LOAN AMOUNTS

For most SBA loans there is no legislated limit to the total amount of the loan that may be requested from the lender. However, the maximum amount the SBA can guaranty is generally $750,000. Thus, with a lender requesting the maximum SBA guaranty of 75 percent, the total loan amount available under this program generally would be limited to $1 million. However, there are some exceptions as presented below in the discussion of specialized loan programs.

Loans approved under CAIP will have the guaranty fee usually paid by the borrower waived. Typically, this amounts to about 3 percent of the guaranteed amount.

ELIGIBILITY

Eligible recipients must be located in, or relocating to, a specific geographic area designated by the US Treasury and the North American Development Bank. The CAIP program has a job criterion. To be eligible, all applicants must provide a written estimate that the number of jobs to be created or preserved within 24 months of the loan's disbursement must not exceed $70,000 of federally guaranteed funds per job created or preserved. All jobs preserved must be at risk due to changing trade patterns.

ELIGIBLE CAIP COMMUNITIES (As of December 3,1998)

This is a listing of all communities which have been designated as eligible for funding under the Community Adjustment and Investment Program (CAIP). Also listed is the SBA field office responsible for each designated community. SBA and USDA are lending partners in CAIP. SBA can guarantee 7(a) loans in any CAIP community listed here. USDA can guarantee loans only in rural areas, usually counties. ARKANSAS: Clay, Lawrence, Mississippi, Monroe, Prairie Randolph, Sharp, and Woodruff Counties Contact: 2120 Riverfront Drive, Little Rock 72202, 501-324-5871.

SBA LOAN MATURITIES

SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)

INTEREST RATES

Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate.

Interest rates may be fixed or variable. Fixed rate loans must not exceed Prime Plus two and one-quarter percent (2.25%) if the maturity is less than seven (7) years, and Prime Plus two and three-quarters percent (2.75%) if the maturity is seven (7) years or more. For loans of less than $25,000, the maximum interest rate must not exceed Prime Plus four and one-quarter percent (4.25%) and four and three-quarters percent (4.75%), respectively; for loans between $25,000 and $50.000, maximum rates must not exceed three and one-quarter percent (3.25%) and three and three-quarters percent (3.75%), respectively.

Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the "Federal Register." The lender and the borrower negotiate the amount of the spread which will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must be no more often than monthly and must be consistent, (e.g., monthly, quarterly, semiannually, annually or any other defined, consistent period).

GUARANTY PERCENTS

No Guaranty Fee

General Information about the Minority and Women Prequalification Loan Program

The Minority Prequalification Pilot Loan Program and the Women's Prequalification Pilot Loan Program use intermediaries to assist prospective minority and women borrowers in developing viable loan application packages and securing loans. The women's program uses only nonprofit organizations as intermediaries; the minority program uses for-profit intermediaries as well.

Once the loan package is assembled, it is submitted to the SBA for expedited consideration; a decision usually is made within three days. If the application is approved, the SBA issues a letter of prequalification stating the SBA's intent to guarantee the loan. The maximum amount for loans under the women's program is $250,000; under the minority program, it is generally the same, although some districts set other limits. With both, the SBA will guarantee up to 80 percent for loans up to & including $100,000, and 75 percent for loans over $100,000. The intermediary (usually a Small Business Development Center) then helps the borrower locate a lender offering the most competitive rates.

Small Business Development Centers serving as intermediaries do not charge a fee for loan packaging. For-profit organizations will charge a fee.

Maximum Amount of Loan

The maximum loan amount for this pilot program is $250,000.

Who is Eligible?

Eligibility requirements include: Businesses at least 51 percent owned, operated and managed by people of ethnic or racial minorities or by women; businesses with average annual sales for the preceding three years that do not exceed $5 million; businesses that employ fewer than 100, including affiliates.

SBA Loan Maturities

SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)

Interest Rates Applicable To SBA Loans

Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate. The only time a commitment fee may be charged is for a loan made under the Export Working Capital Loan Program.

Interest rates may be fixed or variable. Fixed rate loans must not exceed Prime Plus two and one-quarter percent (2.25%) if the maturity is less than seven (7) years, and Prime Plus two and three-quarters percent (2.75%) if the maturity is seven (7) years or more. For loans of less than $25,000, the maximum interest rate must not exceed Prime Plus four and one-quarter percent (4.25%) and four and three-quarters percent (4.75%), respectively; for loans between $25,000 and $50.000, maximum rates must not exceed three and one-quarter percent (3.25%) and three and three-quarters percent (3.75%), respectively.

Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the "Federal Register." The lender and the borrower negotiate the amount of the spread that will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must be no more often than monthly and must be consistent, (e.g., monthly, quarterly, semiannually, annually or any other defined, consistent period).

Loan Program Guaranty Percent

For those applicants that meet the SBA's credit and eligibility standards, the Agency can guaranty up to eighty (80%) percent of loans of $100,000 and less, and up to seventy-five (75%) percent of loans above $100,000 (generally up to a maximum guaranty amount of $750,000).

Loan Program 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.

Disabled Assistance

The SBA has not been provided funding for direct handicapped assistance loans, but such individuals are eligible for all SBA loan guaranty programs.

Veterans

The SBA has not been provided funds for direct loans to Veterans, although Veterans are eligible for special consideration under SBA's guaranty loan programs. The special consideration given such individuals includes:

• Liaison personnel in each field office;
• In-depth management counseling and training assistance; and
• Prompt and priority processing of any loan application.

> See also: Loans & Capital

Author: US Small Business Administration
Source: US Small Business Administration
Description: 7(a) and the New SBA LowDoc Loan Guaranty Programs and Microloan Program and SBAExpress Revision: June 1999

This article is reprinted from the Small Business Forum, the journal of the Association of Small Business Development Centers, which is published by the University of Wisconsin-Extension Small Business Development Center. For information about subscriptions, reprints or submissions, please write 432 North Lake Street, Room 425, Madison, WI 53706, or call (608) 263-7843.

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