Loan guarantee program for small businesses
The U.S. Small Business Administration’s popular 7(a) Loan Guaranty Program guarantees loans of up to $2 million. Many small businesses, however, need much less than that for most of business purposes, so the SBA has developed a program specifically to make smaller loans more easily available.
The program, SBAExpress loan, has a maximum loan size of $350,000, more than double the average size SBA loan, with a streamlined process that usually results in a completed process within 36 hours. The program is so popular that so far this year, SBAExpress loans make up more than 60 percent of all SBA-guaranteed loans.
The streamlined process, one of the many advantages of the SBAExpress loan for both lenders and borrowers, is made possible by the agreements with qualified lenders authorizing them to make eligibility determinations without direct SBA involvement. The program allows lenders to apply for 7(a) loans using their own forms and processes instead of the SBA’s official paperwork. In exchange for that authorization, the SBA guaranty percentage is reduced from the more typical 75 percent of the loan amount to 50 percent.
Adding to the popularity of the SBAExpress is the fact that lenders are not required to take collateral for loans under $25,000, and may use their own collateral policy on loans over $25,000 and up to $150,000. For larger loans, SBA’s general collateral policy applies.
SBAExpress loans follow the 7(a) loan program rules on use of proceeds; accordingly, they may be used for a variety of purposes, but there are also some restrictions.
The loans can be used:
- To purchase land or buildings, cover new construction as well as expansion or conversion of existing facilities;
- To acquire equipment, machinery, furniture, fixtures, supplies, or materials;
- For long term working capital including the payment of accounts payable and/or the purchase of inventory;
- To refinance existing business indebtedness which is not already structured with reasonable terms and conditions;
- For short-term working capital needs including: seasonal financing, contract performance, construction financing, export production, and financing against existing inventory and receivable under special conditions; or
- To purchase an existing business.
Loans cannot be used to refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing, or to effect a partial change of business ownership or a change that will not benefit the business. In addition, these loans can’t be used to reimburse funds owed to any owner. This includes any equity injection, or injection of capital for the purposes of the businesses continuance until the loan supported by SBA is disbursed. They also cannot be used for any “non-sound” business purpose.
Interest rates on SBAExpress loans are tied to the prime rate (as published in the Wall Street Journal) and may be fixed or variable. Lenders and borrowers can negotiate the interest rate, but they may not exceed SBA maximums, which are up to 6.5 percent over prime rate for loans of $50,000 or less, and up to 4.5 percent over the prime rate for loans over $50,000.
SBAExpress allows revolving loans up to 7 years with maturity extensions permitted at the outset.
For more information on the SBAExpress and other SBA programs, visit www.sba.gov.
