Lenders that are
approved by the SBA can make guaranteed loans to
small businesses. About 98% of the firms in the
country meet SBA’s size standards for small
business. SBA offers full faith and credit
guarantees of 90% on loans up to $155,000 and 85%
on larger loans, to a maximum guaranty amount of
$750,000. Maturity can be as long as 25 years.
Rates can range up to 2.75% over New York Prime,
depending upon the maturity. Loan proceeds can be
used for real estate, furniture and fixtures,
machinery and equipment, working capital and to a
limited degree, to refinance existing debt.
To improve cost
effectiveness, certain lenders are now permitted to
retain one half of the SBA guaranty fee (2% of the
guaranteed portion of the loan) on guaranteed loans
of $50,000 or less.
Lenders have a
choice of three types of SBA processing.
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Regular program the lender submits a
complete application package to its local SBA
office. SBA analyses the application and gives
the lender its decision. Turnaround time is
usually two weeks or less.
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Certified Lenders Program (CLP) SBA
places greater reliance upon its participant
lenders. SBA endeavors to review and process
the loan package within three days or less.
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Preferred Lenders Program (PLP) are
selected from the best performing lenders in CLP.
Each PLP lender is given full authority and
responsibility for handling almost all aspects
of the transaction. This includes making the
credit decision, closing the loan, servicing,
administration, and (if necessary) liquidation.
The maximum guaranty on PLP loans is 80%.
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The SBA 7(a) loan
guarantee program provides short- and long-term
financing to eligible and existing small business
that cannot obtain financing on reasonable terms
through normal commercial lending channels. The SBA
provides financial assistance through its
participating lenders in the form of loan
guarantees, not direct loans. This program provides
the nation’s small business community with
manageable long term debt service. These
guarantees are issued to qualified credit worthy
borrowers whose loan applications meet the criteria
of both the lending institution and the Small
Business Administration.
To reduce the
paper work involved in loan requests of $150,000 or
less. The SBA uses a one page application for
SBALowDoc that relies on the strength of the
applicant's character and credit history. Once an
applicant satisfies all of the lender's
requirements, the lender may request an SBALowDoc
guaranty from the SBA.
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The guaranteed portions of SBA loans
can be sold into a national "secondary market"
through a simple transfer agreement. Originating
lenders retain the unguaranteed portions and earn
interest at the borrowers note rate. The originating
lender must remit monthly the pro-rata share of the
payment on the guaranteed portions, less servicing
fees to the fiscal and transfer agent.
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Revenue from selling a loan into the
secondary market is derived from three areas:
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Premium from the sale of
the guaranteed portion
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Service fee during the
life of the loan
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Float of borrower's loan
payment
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The amount of premium earned in the
secondary market is determined by the size, coupon
and maturity on the loan.
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Sale of the guaranteed portion of
the SBA loan is consummated on SBA Form 1086, SBA's
Secondary Participation Guarantee and Certification
Agreement. A copy of the note (SBA Form 147) is also
required.
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Loans under the program are available for most
business purposes, including:
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Real estate purchases
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Machinery
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Equipment
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Inventory
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for working capital.
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The loans cannot be used for speculative purposes.
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The SBA can guarantee under the 7(a) program:
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Maximum of $750,000
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Guaranty rate is: 80%
for loans of $100,000 or less
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75% for loans greater
than $100,000
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90% for loans made under
the Export Working Capital Program.
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The interest rate cannot exceed 2.75 percent over
the prime lending rate as published in The Wall
Street Journal, except for loans under $50,000,
where rates may be slightly higher.
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Maturity up to 7 years are allowed for loans
involving working capital, Terms of 7 to 15 years
are acceptable for the purchase of machinery and
equipment and 15 to 25 years are permitted for loans
involving the purchase or construction of real
estate or plant facilities.
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Loans guaranteed by the SBA, represented by
Guaranteed Interest Certificates, are
unconditionally guaranteed as to principal and
interest by the full faith and credit of the United
States Government.
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SBA
loans historically have provided yields which
out-perform most short term and many long term
investments. The variable rate feature virtually
eliminates interest rate risk while providing the
opportunity to earn attractive yields. Many
purchasers view SBA loans as comparable to 30 or 90
day notes offering a historically generous yield
spread over short term paper and internally
generated commercial loans.
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While SBA adjustable rate loans are attractive
self-managing assets in your loan portfolio, their
unique characteristics also enhance marketability
and liquidity. The adjustable rate feature creates
a more stable market value less dependent on
prevailing interest rates. Relative price
stability enhances the liquidity of SBA loans and
growing investor demand in a national secondary
market increases their marketability.
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SBA
loans provide regularly scheduled (usually monthly)
payments of principal and interest. This cash flow
creates the opportunity for monthly reinvestment and
compounding. Payments are remitted on the 15th of
each month by the fiscal and transfer agent and
owners of multiple loans receive a single check
along with accounting details for each loan.
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SBA
adjustable rate loans are normally indexed to the
prime rate as quoted in the Wall Street Journal and
unusually adjust monthly or quarterly. Since GAP
management addresses the ratio of repricing assets
to repricing liabilities, there are obvious
advantages to positioning funds in products
repricing on a 30 or 90 day basis.
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While regulatory accounting treatment may vary, SBA
loan certificates are generally booked as loans and
may be pledged as collateral for Public Funds,
Federal Reserve and Federal Home Loan Bank advances
and Treasury Tax and Loan Accounts. We recommend
checking with regulatory authorities for specifics.
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Under Risk Based Capital Guidelines for depository
institutions, SBA loans are assigned a zero percent
or twenty percent weight factor depending on your
individual regulatory agency. The Office of the
Comptroller of the Currency has classified them as
zero percent, while the Office of Thrift Supervision
has stated they fall into the twenty percent
category. Please contact your regulatory
authorities for specific risk based capital
classification.
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