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The Small Business Administration is an federal agency operating under the White House cabinet's Secretary of Commerce. It was created by the Small Business Act on July 30, 1953. The essence of the agency's mission is to promote small business development and entrepreneurship.
The SBA is primarily a guarantor of bank loans. It guarantees loans from payment failure by a borrower as an inducement for bankers and lenders to take on small business loans that they might otherwise consider just too risky.
7(a) Loan Guaranty: Commercial lenders apply for 7(a) loans for general business start-up and expansion purposes when they regard a conventional loan as too risky. The maturity of the loan up to 10 years for working capital and 25 years for fixed assets.
504 Loan Programs: Private, non-profit corporations that are set up to contribute to a community's economic development apply for a 504 loan to be given for the acquisition of real estate or equipment for expansion.
7(m) Microloans: Special non-profit lending organizations that are recognized by the SBA provide short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. The SBA guarantees this loan to the intermediary making the microloan.
The SBA administers a number of small business procurement programs like its 8(a) business development program, which is designed to assist socially and economically challenged small businesses obtain federal contracts and subcontracts.
The agency also provides direct loans to homeowners and renter victims of presidentially declared disasters, like Hurricane Katrina victims.
According to the U.S. Government Accountability Office, the SBA's 7(a) loan program grew from roughly 45,000 small business loans in 2000 to 92,500 in 2007. The did so with far fewer employees and smaller costs. In 2001 the SBA had 2,971 employees and by 2006 it saw its employee numbers reduced to 2,147 and its annual budgets reduced.
The criteria for an SBA-backed loan may vary depending on the lending institute, but based on SBA guidelines:
The borrower needs to put in at least 20 – 40% of his own money into the total request. A start-up business will not be 100% financed. The debt/equity ratio must fall within the SBA and the lender's guidelines. For example, lenders typically want to see total liabilities or debt of a business is not more than 4 times the amount of equity. (Or stated differently, when you divide total liabilities by equity, your answer should not be more than 4.) For example, a new business needs a $100,000 to start. The business owner must put $20,000 of her own money into the new business as equity. Her loan will be $80,000. The debt to equity ratio is 4:1.
The business needs to project enough cash flow to pay off the loan
The borrower will need collateral, or a second source of repayment to secure the loan such as the small business owner's house, car, equipment., or bonds. For example, the SBA requires the market value of the house x 80% - mortgage balance.
SBA Secondary Markets
(Need franchipedia entry – Colson Securities Corp., the entity that transforms loans to bonds).
Portions of the SBA 7(a) loans are guaranteed by the SBA. One of the key reasons these are so profitable to lenders is that they can be transformed into AAA rated government bonds through a structure that the SBA set up.
SBA Training and Consulting Entities:
(Need franchipedia entry - SDIC and SCORE)
Criticisms of the SBA:
One criticism of the Small Business Administration is that the government is in essence carrying out a welfare program to develop the country's more riskier small business ventures. Most small businesses, whether funded by conventional or SBA-backed loans, will go out of business. Some argue that federal money used to support the SBA can be used more wisely elsewhere.
A more recent criticism on the opposite end of the spectrum is that just when the credit crisis has hit in 2008, the nation's top banks have decreased SBA-backed loans meant to stimulate main street, small businesses in various towns and cities throughout the country. In December of 2008, one author in the New York Times writes, "Why are SBA loans drying up just when they are needed the most?"