SBA

The U.S. Small Business Administration, established in 1953, is the primary advocate of small business in the federal government. While it provides a number of services, including the Service Corps of Retired Executives (SCORE) and ACE-Net, the Internet investor-entrepreneur matching service, SBA is best known as the small business lender of last resort.

Through its many loan guarantee programs, SBA provides the only access to capital many small businesses have. Loans with SBA guarantees may be used to start a business, or franchise, to buy an existing business or independently managed franchise, or to finance the purchase of raw materials or inventory, furniture and fixtures, machinery or equipment, land for construction, building construction, to provide working capital or to refinance specific debt.

SBA loans cannot be used by most nonprofit organizations, for gambling or illegal activities, to finance speculative ventures such as wildcat oil and gas wells, dealing in commodity futures, or real estate held for investment purposes. They cannot be used to finance lending or investment entities such as life insurance companies, investment companies, banks, finance companies and other financial businesses. Pyramid or multi-level marketing plans are also out as is the construction of certain combined residential /rental spaces and business buildings.

To be considered for a loan, an individual or business must meet the following conditions:

Must be classified as a small business
Have adequate credentials
Cannot be a leader in the field
Must comply with federal employment laws
Must have exhausted traditional borrowers
Must not be in jail, on probation or parole, or have a criminal case pending.
You also cannot get an SBA loan to finance a publication of opinion.

SBA Loan Eligibility

Eligibility is generally determined by four factors:

Type of business: 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.

An eligible small business is independently owned and operated and not dominant in its field.

Size of business: The definition of a small business varies from industry to industry. 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.

Type of Business	Maximum business size
Retail and Service	$3.5 million to $13.5 million
Construction	$7.0 million to $17.0 million
Agriculture	$0.5 million to $3.5 million
Wholesale	No more than 100 employees
Manufacturing	No more than 500 to 1,500 employees

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 a loan, 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 funds: 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.

SBA loans 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. (You cannot use an SBA guarantee to reduce personal obligation for a loan.)

Special Situations: A number of businesses require special considerations.

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 C are eligible if the facilities are open to the general public, or, in membership only situations, if no group is discriminated against and if there are no quotas.

Farms and agricultural businesses C are eligible, but applicants should first explore Farmers Home Administration (FmHA) programs, particularly if the applicant has a prior or existing relationship with FmHA. Unfortunately, a worldwide web search indicates that the Farmers Home Administration has farmed out its information to for profit companies to sell.

Fishing vessels C are eligible, but if you are seeking funds to construct or recondition vessels with cargo capacity of five tons or more, you must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce. See www.nmfs.gov/trade/newgrant

Medical facilities C 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 C 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 the following conditions are met.

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 company 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 family members 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 assets, any working capital needs must be financed separately.

Change of ownership C loans are eligible if 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 to let a borrower buy into a different business or buy out part or all of an existing owner=s interest, if the owner continues in that role. Loans to buy out family members are discouraged.

Aliens C can get SBA loans if they are resident, lawful temporary residents, etc. Status us used in determining the degree of risk relating to the continuity of the applicant's business. Excessive risk may be offset by full collateralization.

Probation or parole C applications will not be accepted if the principal or any one of those required to submit a personal history statement:

Is in jail, on parole, or 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 answered yes to any one of the questions on the Statement of Personal History. The SBA is able to evaluate 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 C Businesses cannot be engaged in illegal activities, loan packaging, speculation, multi sales distribution, gambling, investment or lending, or where the owner is on parole. SBA loan guarantees cannot be obtained for:

Real estate investment firms which hold real property for investment purposes as opposed to using the property for company purposes. This area is somewhat grey in the cases of parking lots and golf driving ranges since they are businesses, but also ways of warehousing property until real estate values go up.
Other speculative activities are firms hoping to develop profits from fluctuations in price rather than through the normal course of trade, such as dealing in commodities futures, when not part of the regular activities of the business. Dealers of rare coins and stamps are not eligible.
Academic schools;
Lending activities, including 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 include 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 includes 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 the sale of official state lottery tickets under a state license, or legal gambling activities licensed and supervised by a state authority.
Charitable, religious or other non-profit or benevolent 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 years for working capital, although that period may be increased to 10 years to ensure repayment.

The maximum length of time permitted to repay 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. When the loan is to construct or significantly renovate business premises, the 25-year maximum would be in addition to the time needed to complete construction. Significant renovation means construction costs of at least one-third of the current value of the property.)

Fees Associated With SBA Loans

The SBA charges lenders a guaranty and a servicing fee for each loan approved, to defray the program=s expenses. 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 percent of the guaranteed portion; for loans more than $80,000 but less than $250,000, a three percent fee is charged; for the next $250,000 of the guaranteed portion, a 3.5 percent fee is 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.

Although processing fees, origination fees, application fees, points, brokerage fees, bonus points, and other fees are frequently charged in commercial banking, they are prohibited in most SBA program loans. The only time a commitment fee may be charged is for a loan made under the Export Working Capital Loan Program.

Stewart-Gordon Associates, Inc.
P.O. Box 781992
Dallas TX 75378-1992
voice (972) 620-2489
fax (972) 406-0213
e-mail Tom Stewart-Gordon