Access to Capital is a major need for new and existing entrepreneurs as they start and grow their small business. The Alabama SBDC at UNA provides information on financing options available to small businesses and assistance in preparing a loan application with documentation necessary to obtain the capital needed. Advisors can assist you in identifying sources of funding, determining the amount of funding needed, preparing financial projections and preparing you for meeting with lenders and potential investors.
Information needed to begin preparation of business plan and loan package are:
SBA LOAN PROGRAMS
(The following information was taken from SBA’s website—Resource Guide; click on each program for more detailed information)
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, its variety of uses for the loan proceeds, and its availability. The program has broad eligibility requirements and credit criteria to accommodate a wide range of financing needs.
The business loans that SBA guarantees do not come directly from the agency, 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 guaranty reduces the lender’s risk of borrower non-payment by providing a guaranty on a percentage of the total loan. If the borrower defaults, the lender can request the SBA to pay the lender that percentage of the outstanding balance the agency guaranteed. This allows the lender to recover a portion of the defaulted debt from the SBA if the borrower can’t make the payments. The borrower is still obligated for the full amount.
To qualify for an SBA loan, a small business must meet the lender’s criteria and the 7(a) requirements. In addition, 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.
CERTIFIED DEVELOPMENT COMPANY LOAN PROGRAM
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 (listed previously) are also excluded from the 504 loan program.
The SBA’s 504 Certified Development Companies serve their communities by financing business expansion needs. Their professional staffs work directly with borrowers to tailor a financing package that meets program guidelines and the credit capacity of the borrower’s business.
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.
The SBA 504 loan is distinguished from the SBA 7(a) loan program in these ways:
The maximum debenture, or long-term loan, is:
- $5 million for businesses that create a certain number of jobs or improve the local economy;
- $5 million for businesses that meet a specific public policy goal, including veterans; and
- $5.5 million for manufacturers and energy related public policy projects.
Recent additions to the program allow $5.5 million for each project that reduces the borrower’s energy consumption by at least 10 percent; 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 average is at least $65,000.
- Eligible project costs are limited to long-term, fixed assets such as land and building (occupied by the borrower) and substantial machinery and equipment.
- Most borrowers are required to make an injection (borrower contribution) of just 10 percent which allows the business to conserve valuable operating capital. A further injection of 5 percent is needed if the business is a start-up or new (less than two years old), and a further injection of 5 percent is also required if the primary collateral will be a single-purpose building (such as a hotel).
- Two-tiered project financing: A lender finances approximately 50 percent of the project cost and receives a first lien on the project assets (but no SBA guaranty); A CDC (backed by a 100 percent SBA-guaranteed debenture) finances up to 40 percent of the project costs secured with a junior lien. The borrower provides the balance of the project costs.
- Fixed interest rate on SBA loan. The SBA guarantees the debenture 100 percent. Debentures are sold in pools monthly to private investors. This low, fixed rate is then passed on to the borrower and establishes the basis for the loan rate.
- 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.
- 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.
- Long-term real estate loans are up to 20-year term, heavy equipment 10- or 20-year term and are self-amortizing.
Businesses that receive 504 loans are:
- Small — net worth under $15 million, net profit after taxes under $5 million, or meet other SBA size standards.
- Organized for-profit.
- Most types of business — retail, service, wholesale or manufacturing.
MICROLOAN PROGRAM (LOANS UP TO $50,000)
The Microloan program provides very small loans (up to $50,000) to women, low-income, minority, veteran, 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.
GRANTS
Grant programs are typically not available for start-up and existing non-profit businesses, with a few exceptions, such as programs for high technology businesses and research and development.
ALABAMA COUNCIL OF LOCAL GOVERNMENTS – Revolving Loan Funds
(serving SBDC at UNA service area)
Northwest Alabama Council of Governments (serving Colbert, Lauderdale, Franklin, Winston and Marion Counties)
West Alabama Regional Commission (serving Fayette and Lamar Counties)
Regional Planning Commission of Greater Birmingham (serving Walker County)
North Central Alabama Council of Governments (serving Lawrence County)