In their book Start Your Own Business, the staff of Entrepreneur Media Inc. guides you through the critical steps to starting your business, then supports you in surviving the first three years as a business owner. In part two of this edited excerpt, the authors offer a brief description of the different types of SBA small business loans available.
The MicroLoan Program helps entrepreneurs get very small loans, up to $50,000. The average loan in 2012 was for $13,000. The loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies, and working capital, but they cannot be used to pay existing debts or to purchase real estate. This program is unique because it assists borrowers who generally don't meet traditional lenders’ credit standards.
MicroLoans are administered through nonprofit intermediaries, which receive loans from the SBA, then turn around and make loans to entrepreneurs. Small businesses applying for MicroLoan financing may be required to complete some business-skills training before a loan application is considered. The maximum term for MicroLoans is six years, and interest rates vary.
CDC/504 Loan Program
The 504 Loan provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. Loans are most often used for growth and expansion. 504 Loans are made through Certified Development Companies (CDCs)—nonprofit intermediaries that work with the SBA, banks, and businesses looking for financing.
If you're seeking funds up to $1.5 million to buy or renovate a building or put in some major equipment, consider approaching a CDC. Typical percentages for this type of package are 50 percent financed by the bank, 40 percent by the CDC, and 10 percent by the business.
In exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or meet certain public policy goals. Businesses that meet these goals are those whose expansion will contribute to a business district revitalization, such as an empowerment zone; a minority-owned business; an export or manufacturing company; or a company whose expansion will contribute to rural development.
If your business has the goal of job creation, the SBA program will lend up to $5 million for meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal, according to the guidelines for the program.
8(a) Business Development Program
The SBA’s 8(a) Program is a small-business set-aside program that allows certified socially and economically disadvantaged companies to enter the federal procurement market as well as the economic mainstream. The 8(a) Program is a starter program for minority businesses, which must leave the program after nine years.
Entrepreneurs who participate in the 8(a) Program are eligible for the 7(a) Guaranty Loan and the Pre-Qualification Programs. Businesses must be owned by a socially and economically disadvantaged individual. Socially disadvantaged categories include race and ethnicity. Participants can receive sole-source contracts, up to $4 million for goods and services and $6.5 million for manufacturing. To qualify as economically disadvantaged, you must have a net worth of less than $250,000, assets under $4 million, as well as two years’ worth of tax returns. There are other qualifications, including that the firm must be at least 51 percent owned by the program applicant and owners must show good character.
Export Working Capital Program
If you're planning to export, you should investigate the Export Working Capital Program. This allows a 90 percent guarantee on loans up to $5 million. Loan maturity is one year; funds can be used for transaction financing. The exports financed must be shipped and titled from the U.S. The loans are typically processed quickly.