Finding capital

7(a) loan program Company loan program (504 loans)

The SBA has a variety of loan programs that are distinguished by their different uses of the loan proceeds, their dollar amounts and the requirements placed on the actual lenders. The three principal players in most of these programs are the applicant small business, the lender and the SBA. The SBA does not actually provide the loan, but rather it guarantees a portion of the loan provided by a lender (with the exception of microloans).

The 7(a) Loan program is the SBA's primary business loan program. It is the agency's most frequently used non-disaster financial assistance program because of its flexibility in loan structure, variety of uses for the loan proceeds and availability. The program has broad eligibility requirements and credit criteria to accommodate a wide range of financing needs.

The 504 Loan program is an economic development program that supports American small business growth and helps communities through business expansion and job creation. The 504 loan program provides long-term, fixed-rate, subordinate mortgage financing for acquisition and/or renovation of capital assets including land, buildings and equipment. Some refinancing is also permitted. Most for-profit small businesses are eligible for this program. The types of businesses excluded from 7(a) loans are also excluded from the 504 loan program.

The business applies directly to a lender. Generally, an application includes a business plan that explains what resources will be needed to accomplish the desired business purpose including the associated costs, the applicants' contribution, planned uses for the loan proceeds, a listing of the assets that will secure the loan (collateral), a history of the business and explanation of how the business generates income. Most important, the borrower provides an explanation of a repayment plan.

The business loans that SBA guarantees do not come from the SBA, but rather from banks and other approved lenders. The loans are funded by these organizations and they make the decisions to approve or deny the applicants' request for financial assistance.

The SBA's 504 Certified Development Companies (CDC) serve their communities by financing business expansion needs. Their professional staff works directly with borrowers to tailor a financing package that meets program guidelines and the credit capacity of the borrower's business.

The lender will analyze the application to see if it meets their criteria and make a determination if they will need an SBA guaranty in order to provide the loan. SBA will look to the lender to do much, if not all, of the analysis before it provides its guaranty to the lender's proposed loan. The SBA's business loan guaranty programs provide a key source of financing for viable small businesses that have real potential but cannot qualify for credit on reasonable terms by themselves.

The guaranty that SBA provides the lender reduces the lender's risk of borrower non-payment because the guaranty assures the lender that if the borrower defaults, the lender can request that SBA pay the debt rather than the borrower. SBA only guarantees a portion or percentage of every loan not the whole debt, so in the event of default the lender will only get partially repaid by SBA. This means that if the borrower can't make the payments and defaults, the lender can recover the guaranteed portion of the defaulted debt from the SBA. The borrower is still obligated for the full amount.

CDCs work with banks and other lenders to make loans in first position on reasonable terms, helping lenders retain growing customers and provide Community Reinvestment Act credit.

Program additions based on energy consumption

To qualify for an SBA guaranteed loan, a small business must meet the lender's criteria and the 7(a) program requirements. One of those requirements is that the lender must certify that it would not provide this loan under the proposed terms and conditions without an SBA guaranty. If the SBA is going to provide a lender with a guaranty, the applicant must be eligible and creditworthy and the loan structured under conditions acceptable to the SBA.

Recent additions to the program allow $5.5 million for each project that reduces the borrower's energy consumption by at least 10%; and $5.5 million for each project that generates renewable energy fuels, such as biodiesel or ethanol production. Projects eligible for up to $5.5 million under one of these two requirements do not have to meet the job creation or retention requirement, so long as the CDC portfolio reflects an average jobs to debenture portfolio ratio of at least one job per $65,000.

SBA only guarantees a portion of any particular 7(a) loan so each loan will have an SBA share and an unguaranteed portion which gives the lender a certain amount of exposure and risk on each loan. The percentage of guaranty depends on either the dollar amount or the program the lender uses to obtain its guaranty. For loans of $150,000 or less the SBA generally guarantees as much as 85% and for loans over $150,000 the SBA generally provides a guaranty of up to 7 %.

• Eligible project costs are limited to long-term, fixed assets such as land and building (occupied by the borrower) and substantial machinery and equipment.

The maximum dollar amount of a single 7(a) loan is $5 million and there is no minimum. The maximum dollar amount of the SBA share which can be provided to any one business (including affiliates) is $3.75 million.

• Most borrowers are required to make an injection (borrower contribution) of just 10% which allows the business to conserve valuable operating capital. A further injection of 5% is needed if the business is a start-up or new (less than two years old), and a further injection of 5% is also required if the primary collateral will be a single-purpose building (such as a hotel).

The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender but is subject to the SBA maximums. Both fixed and variable interest rate structures are available.

• Two-tiered project financing: A lender finances approximately 50% of the project cost and receives a first lien on the project assets (but no SBA guaranty); A CDC (backed by a 100% SBA-guaranteed debenture) finances up to 40% of the project costs secured with a junior lien. The borrower provides the balance of the project costs.

Loans guaranteed by the SBA are assessed a guaranty fee. This fee is based on the loan's maturity and the dollar amount guaranteed, not the total dollar amount of the loan. The guaranty fee is initially paid by the lender and then passed on to the borrower at closing. The funds the business needs to reimburse the lender can be included in the overall loan proceeds.

• Fixed interest rate on SBA loan. The SBA guarantees the debenture 100%.

The SBA's 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. Maturity generally ranges from 7 to 10 years for working capital, business start-ups, and business acquisition type loans, and up to 25 years if the purpose is to acquire real estate or fixed assets with a long term useful life.

• All project-related costs can be financed, including acquisition (land and building, land and construction of building, renovations, machinery and equipment) and soft costs, such as title insurance and appraisals. Some closing costs may be financed.

The structure of a basic 7(a) loan is that repayment has to be set up so the loan is paid in full by maturity. Over the term of the loan there can be additional payments or payment relaxation depending on what is happening with the business. Balloon payments and call provisions are not allowed on any 7(a) term loan.

• Collateral is typically a subordinate lien on the assets financed; allows other assets to be free of liens and available to secure other needed financing.

For collateral, SBA expects every 7(a) loan to be secured first with the assets acquired with the loan proceeds and then with additional business and personal assets, depending upon the loan amount and the way the lender requests their guaranty. However, SBA will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. When the lender says they will need an SBA guaranty, the applicant should be prepared for liens to be placed against all business assets. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals may also be required. Loans under $25,000 do not require collateral.

• Long-term real estate loans are up to 20-year term, heavy equipment 10- or 20-year term and are self-amortizing.

Key business resources in Maine

Eligibility for a 7(a) loan is based on a number of different factors, ranging from size and nature of business to use of proceeds and factors that are case specific.

U.S. Small Business Administration Maine District Office 68 Sewall St. Edmund S. Muskie Federal Bldg., Rm. 512 Augusta, ME 04330 207-622-8551 www.sba.gov/me

Size Eligibility

An in-depth listing of standards can be found at www.sba.gov/size

Eastern Maine Development Corp. 40 Harlow St. Bangor, ME 04401-5102 207-942-6389 or 800-339-6389 Maine Only 207-942-3548 Fax www.emdc.org

The first eligibility factor is size, as all loan recipients must be classified as “small” by the SBA. The size standards for all 7(a) loans are outlined below.

CEI 36 Water St./P.0. Box 268 Wiscasset, ME 04578-0268 207-882-7552 • 207-882-7308 Fax www.ceimaine.org

SBA Size Standards have the following general ranges:

• Manufacturing: from 500 to 1,500 employees;

Granite State Development Corp. Jim Maxwell 183 Newhall Rd. Wells, ME 04090 207-646-5988 www.granitestatedev.com

• Wholesale trades: up to 100 employees;

Pine Tree State Certified Development Corp. Field Rider 120 Exchange St., Ste. 205 Portland, ME 04101 207-773-3104 frider@megalink.net www.pinetreestatecdc.com

Microloan program

• Services: an average of $2 million to $35.5 million in annual receipts;

Entrepreneurs and small business owners interested in small amounts of business financing (up to $50,000) should contact the nearest SBA district office for information about the nearest Microloan Program Intermediary Lender or go to www.sba.gov/microloans

• Retail trades: an average of $7 million to $35.5 million in average annual receipts

The Microloan program provides very small loans (up to $50,000) to women, low-income, minority, veterans and other small business owners through a network of more than 100 intermediaries nationwide. Under this program, the SBA makes funds available to nonprofit intermediaries that, in turn, make the small loans directly to start-up and existing businesses. Entrepreneurs work directly with the Intermediaries to receive financing, and business knowledge support. The proceeds of a microloan can be used for working capital, or the purchase of furniture, fixtures, supplies, materials, and/or equipment. Microloans may not be used for the purchase of real estate. Interest rates are negotiated between the borrower and the Intermediary. The maximum term for a microloan is six years. Because funds are borrowed from the Intermediary, SBA is not involved in the business loan application or approval process. And, payments are made directly from the small business to the Intermediary.

• Construction: an average of $7 million to $33.5 million in annual receipts;

The program also provides business-based training and technical assistance to micro-borrowers and potential micro-borrowers to help them successfully start or grow their businesses. Such training and technical assistance may include general business education, assistance with business planning, industry-specific training, and other types of training support.

Subhead for these listings

• Agriculture, forestry, fishing and hunting: an average of $750,000 to $17.5 million in average annual receipts.

Androscoggin Valley Council of Governments 125 Manley Rd. Auburn, ME 04210 207-783-9186 • 207-783-5211 Fax www.avcog.org

There is an alternate size standard for businesses that do not qualify under their industry size standards for SBA funding. That alternative is that the applicant business (plus affiliates can't have a tangible net worth exceeding $15 million and average net income exceeding $5 million for the last two years). This new alternate makes more businesses eligible for SBA loans and applies to SBA non-disaster loan programs, namely its 7(a) business loans and certified development company programs.

Community Concepts, Inc. 17-19 Market Sq./P.O. Box 278 South Paris, ME 04281 207-743-7716 or 800-866-5588 www.community-concepts.org

The second eligibility factor is based on the nature of the business and the process by which it generates income or the customers it serves. The SBA has general prohibitions against providing financial assistance to businesses involved in such activities as lending, speculating, passive investment, pyramid sales, loan packaging, presenting live performances of a prurient nature, businesses involved in gambling and any illegal activity.

CEI 36 Water St./P.O. Box 268 Wiscasset, ME 04578-0268 207-882-7552 cei@ceimaine.org www.ceimaine.org

The SBA also cannot make loan guaranties to non-profit businesses, private clubs that limit membership on a basis other than capacity, businesses that promote a religion, businesses owned by individuals incarcerated or on probation or parole, municipalities, and situations where the business or its owners previously failed to repay a federal loan or federally assisted financing, or are delinquent on existing federal debt.

MaineStream Finance 262 Harlow St./P.O. Box 1162 Bangor, ME 04402-1162 207-973-3500 or 800-215-4942 www.mainestreamfinance.org

The third eligibility factor is use of proceeds. A Basic 7(a) loan can provide proceeds to purchase machinery, equipment, fixtures, supplies and to make improvements to land and/or buildings that will be occupied by the subject applicant business. Proceeds can also be used to expand or renovate facilities; acquire machinery, equipment, furniture, fixtures and leasehold improvements; acquire businesses; start businesses; for working capital; acquire land or build a location; or to refinance debt under certain conditions.

Northern Maine Development Commission 11 W. Presque Isle Rd./P.O. Box 779 Caribou, ME 04736 207-498-8736 or 800-427-8736 www.nmdc.org

Export Working Capital Program

SBA 7(a) loan proceeds cannot be used for making investments, providing funds to any of the owners of the business except for ordinary compensation for actual services provided; for floor-plan financing; or for a purpose that does not benefit the business.

The SBA's Export Working Capital Program (EWCP) assists businesses exporters in meeting their short-term export working capital needs. Exporters can use the proceeds to make the products they will be exporting. They can also apply for such lines of credit prior to finalizing an export sale or contract. With an approved EWCP loan in place, exporters have greater flexibility in negotiating export payment terms — secure in the assurance that adequate financing will be in place when the export order is won.

The fourth factor involves a variety of requirements such as SBA's credit elsewhere test where the personal resources of the owners need to be checked to see if they can make a contribution before getting a loan guaranteed by the SBA. It also includes the SBA's anti-discrimination rules and limitations on lending to agricultural enterprises because there are other agencies of the Federal government with programs to fund such businesses.

Application is made directly to SBA-participating lenders. Businesses are encouraged to contact SBA staff at their local U.S. Export Assistance Center to discuss whether they are eligible for the EWCP and whether it is the appropriate tool to meet their export financing needs. Participating lenders review/approve the application and submit the guaranty request to SBA staff at the local Export Assistance Center.

Special purpose 7(a) loan programs U.S. Export Assistance Centers

The 7(a) loan program is the most flexible of the SBA's lending programs. Over time, the SBA has developed several variations of the basic 7(a) loan in order to address specific financing needs for particular types of small businesses or to give the lender greater flexibility with the loan's structure. The general distinguishing feature between these loan types is their use of proceeds. These programs allow the proceeds to be used in ways that are not otherwise permitted in a basic 7(a) loan.

To find your nearest USEAC, visit: www.sba.gov/content/us-export-assistance-centers

SBAExpress

The SBAExpress loan or line of credit is a flexible smaller loan up to $350,000 that a designated lender can provide to its borrower using mostly their own forms, analysis and procedures to process, structure, service, and disburse this SBA-guaranteed loan. When structured as a term loan the proceeds and maturity are the same as a basic 7(a) loan. When structured as a revolving line of credit, the requirements for the payment of interest and principal are at the discretion of the lender and maturity can't exceed seven years.

SBA trade finance specialists are in 19 U.S. Export Assistance Centers, which also are staffed by U.S. Department of Commerce and, in some locations, personnel from the Export-Import Bank. The USEACs also work closely with other federal, state and local international trade organizations to provide assistance to small businesses.

CAPLines

The CAPLines program for loans up to $5 million is designed to help small businesses meet their short-term and cyclical working capital needs. The programs can be used to finance seasonal working capital needs; finance the direct costs of performing certain construction, service and supply contracts, subcontracts, or purchase orders; finance the direct cost associated with commercial and residential construction; or provide general working capital lines of credit. The maturity can be for up to 10 years except for the builders' CAPLine, which is limited to 36 months after the first structure is completed.

The U.S. Department of Commerce has many programs to assist businesses who export. Check the International Trade Administration website listed below for information on the best foreign markets for U.S. products, resources to help you sell your products, market research information, statistics, NAFTA rules, worldwide trade events, tariffs and much more.

Guaranty percentages are the same as for a basic 7(a) loan.

For more information, contact:

There are four distinct short term loan programs under the CAPLine umbrella:

Jeffrey W. Porter

• 1. The Contract Loan Program is used to finance the cost associated with contracts, subcontracts, or purchase orders. Proceeds can be disbursed before the work begins. If used for one contract or subcontract, it is generally not revolving; if used for more than one contract or subcontract at a time, it can be revolving. The loan maturity is usually based on the length of the contract, but no more than 10 years. Contract payments are generally sent directly to the lender but alternative structures are available.

Director

• 2. The Seasonal Line of Credit Program is used to support buildup of inventory, accounts receivable or labor and materials above normal usage for seasonal inventory. The business must have been in business for a period of 12 months and must have a definite established seasonal pattern. The loan may be used over again after a “clean-up” period of 30 days to finance activity for a new season. These loans also may have a maturity of up to five years. The business may not have another seasonal line of credit outstanding but may have other lines for non-seasonal working capital needs.

U.S. Department of Commerce,

• 3. The Builders Line Program provides financing for small contractors or developers to construct or rehabilitate residential or commercial property. Loan maturity is generally three years but can be extended up to five years, if necessary, to facilitate sale of the property. Proceeds are used solely for direct expenses of acquisition, immediate construction and/or significant rehabilitation of the residential or commercial structures. The purchase of the land can be included if it does not exceed 20% of the loan proceeds. Up to 5% of the proceeds can be used for physical improvements that benefit the property.

Commercial Service

• 4. The Working Capital Line Program is a revolving line of credit (up to $5 million) that provides short term working capital. These lines are generally used by businesses that provide credit to their customers, or whose principle asset is inventory. Disbursements are generally based on the size of a borrower's accounts receivable and/or inventory. Repayment comes from the collection of accounts receivable or sale of inventory. The specific structure is negotiated with the lender. There may be extra servicing and monitoring of the collateral for which the lender can charge up to 2% annually to the borrower.

511 Congress St.

Portland, ME 04101

207-541-7430

www.export.gov/Maine

Jeffrey.Porter@trade.gov