| Government
Financing Programs
For many small businesses,
government assistance can make the difference in getting the
money they vitally need to start, continue, or expand
operations.
The Small Business Administration (SBA) is a federal agency that
offers a number of financing and operations assistance programs
to small businesses. The programs include loan guarantees,
training and educational programs, advisory services,
publications, financial programs, and contract assistance. In
fiscal year 2000/2001, nearly $12 billion in long-term credit
and other financial assistance was provided to more than 48,000
small businesses through SBA's network of participating banks,
non-bank lenders, certified development companies, and
SBA-licensed companies.
State and local governments also offer an array of financing
assistance.
SBA
Financing for Small Businesses: Currently, there are
three basic financing programs that remain available through the
SBA: the Microloan program for small businesses loans under
$35,000, the Section 7(a) loan guarantee program, and the
Section 504 Community Development Corporation tax credit
program. All SBA guaranteed loans are done via your local bank.
The SBA does not loan directly anymore.
The Microloan program is perhaps the most accessible to startup
businesses. Microloan funds are SBA grants to approved,
nonprofit organizations that accept loan applications and make
loan decisions.
The Section 7(a) loan guarantee program includes a variety of
separate specialized programs, but the most popular has been
"LowDoc." This program was implemented in 1993 to
increase the availability of small loans (under $150,000) to
businesses by reducing the paperwork previously required for an
SBA loan guarantee. The SBA LowDoc application is a one-page
form that, on one side, has the applicant's SBA loan application
and, on the other side, has the lender's request for an SBA
guarantee.
The Section 504 program involves SBA participation in private,
nonprofit companies (Certified Development Companies or "CDCs")
established for the purpose of providing long-term, fixed-asset
financing to small businesses.
SBA
Loan Guarantees: The SBA offers private lenders a
guarantee on loans made to qualified small businesses. If the
borrower fails to pay the loan, the lender can usually obtain up
to 85 percent of the outstanding loan principal from the SBA.
The government guarantee encourages lenders to grant credit that
otherwise would not be available on reasonable terms and
conditions. Commercial lenders often prefer a SBA-guaranteed
small businesses loan because the federal guarantee not only
reduces the lender's risks, but the bank has a readily available
secondary market in which to sell the guaranteed portion of the
loan. In addition, the guaranteed portion of the loan does not
count against the federally mandated reserve funds that banks
must maintain as protection against loan losses.
Section
504 Loan Program (CDCs): Section 504 loans are
extended through SBA-approved companies called Certified
Development Companies ("CDCs"). A CDC is a private
nonprofit corporation set up to contribute to the economic
development of its community or region. Typical CDC-financed
projects range in size from $500,000 to $2 million, with an
average cost of $1 million. The total size of projects using CDC
financing is unlimited, but, as with SBA loan guarantees, the
maximum amount of CDC participation in any individual project is
$1,000,000 (or $1.3 million for some public projects).
Participants in a CDC are usually banks, utilities, professional
organizations, community groups, and private investors. For
banks in particular, lending through a CDC is an opportunity for
them to meet their bank regulatory requirements for community
lending while spreading the risk from those investments among
the separate CDC corporate members. The bank also need not
consider their CDC participation against their loan loss
reserves. CDCs can also minimize risks by selling 100 percent
SBA-guaranteed debentures to private investors in amounts up to
40 percent of a project or $750,000, whichever is less. Finally,
CDC investing by banks creates an attractive loan-to-value
ratio; the bank usually contributes only about 50 percent of the
CDC loan proceeds, yet is given a priority claim against the
value of the project or collateral.
SBA
Financing for Exporting: For those small businesses
considering exporting outside the U.S., the SBA and several
other government agencies offer special financing programs.
Note, however, that while exporting may offer tremendous market
potential for certain small companies, there will be additional
research and preparation expenses necessary for developing and
implementing an international business plan.
Among the additional considerations that may affect your costs
include: multinational legal compliance (labeling, packaging,
product safety and liability laws, etc.), additional promotional
material for different countries and languages, transportation
costs for product/service delivery and personnel travel, and
obtaining any required export licenses. Help in preparing your
plan, and in finding more information about exporting, can be
obtained through federal SBA and Department of Commerce
assistance programs, state commerce departments, local chambers
of commerce, international trade associations, export management
and trade companies, and private consulting firms.
The SBA's financing programs include:
The Export Working Capital Programs
The International Loan Program
State
and Local Public Funding: In an effort to improve
their local economies, most states, and many municipalities and
counties, sponsor a variety of public funding sources for small
business concerns. At the state level, nearly all states have
some form of state economic development agency and/or state
finance authority that make loans or loan guarantees to small
businesses. State Commerce Departments often have direct or
participating loan programs that may be even more attractive
than SBA-guaranteed loan programs.
States also receive federal
money through federal Housing and Urban Development (HUD) block
grants that can be used for a variety of local improvements,
including small business financing programs. Urban development
spending for larger cities, or smaller city community assistance
programs, are oft-used purposes for the federal money. While the
criteria for a small business to obtain a loan of grant money
varies between states, the state will typically expect owner
equity participation and evidence that a clear economic or
social benefit to the local community will result from the
funding. The amount of money made available at the local level
will usually depend upon the perceived need for job creation in
the area and the relative income level of that community.
In addition to state money, local county or municipal
governments often loan small amounts of capital to local
businesses. These local, "microloan" programs may be
characterized by minimal (and sporadic) funding, so the timing
of your request can be critical. Try to contact any local
agencies as soon as possible, even if you don't need the money
immediately, to determine the available funds at that time and
when the program is expected to receive any additional money.
Local programs can loan small amounts of money, e.g., under
$10,000, for working capital, equipment or inventory purchasing,
or property improvements.
Finally, don't forget to check local colleges, universities, or
trade schools to see if they have any small business assistance
programs. Some institutions, with the help of public funding,
provide business "incubator" programs that can include
consulting, marketing, services, facilities, and financing
opportunities to local businesses as part of the institution's
business education program.
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