The U.S. Small Business Administration (SBA) is an agency of the federal government whose mission is to encourage development of a robust small business sector. An important plank to fulfill their mission is through financial assistance programs that work in tandem with the private sector.
Banks, savings and loans, credit unions, and other specialized lenders participate with SBA to provide small business loans that are structured to assist small business owners with enhanced loan terms without sacrificing credit quality.
7(a) Loan Guarantee Program
By executing an SBA Form 750, the Deferred Participation Agreement, lending partners may participate in the 7(a) loan guarantee program, which offers the agency’s loan guarantee for loan submitted in accordance with standing guidelines for the entire term of loan.
According to the SBA’s standard operating procedures, when a lending partner applies to SBA for a guaranty on a proposed loan, it must certify that it would only make the loan if SBA guarantees it. This tenant is known as the “credit elsewhere rule.” SBA then decides whether to guarantee the loan based on the information provided in the loan application.
If a guaranteed loan defaults, the lender may request SBA to purchase the guaranteed portion, which is generally for 75 percent of the loan amount.
In addition, SBA offers its lending partners different levels of lending authority and responsibility, depending on demonstrated participation interest and competency. Lenders attaining higher degrees of participation have more flexibility in making decisions associated with processing, closing, and administering each loan.
CDC/504 Loan Program
SBA sponsors semi-governmental entities known as a Certified Development Company (CDC), which is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation.
CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
Typically, a 504 project includes:
- A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
- A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost;
- A contribution from the borrower of at least 10 percent equity.
For third-party lenders, the participating financing more closely resembles conventional lending, in that there are fewer restrictions on loan terms and documentation, but the senior loans do not carry an explicit guarantee of the SBA, but rather are just provide for a senior position on a loan for a minimum of 50 percent of the project financing.
Read more at SBA.