Small Business Administration Loan Guarantees
The U.S. Small Business Administration (SBA) offers loan guarantees to banks, savings and loan associations, credit unions, community development financial institutions, and other authorized specialty lenders. While the SBA does not lend money directly to small businesses (other than for disaster relief loans), it can guarantee certain portions of business loans made by banks and other lenders for loans that conform to SBA guidelines.
Personal guarantees from the owner(s) of the small business are always requested on SBA loans, and contrary to popular belief, SBA loans are not made to persons or businesses with bad credit. To qualify for an SBA guarantee, the business must show that it cannot obtain financing at reasonable rates and terms without such a guarantee, and that it has the cash flow needed to service the loan.
The most common SBA loans are described below:
SBA’s 7(a) Loan Program is its most popular and flexible program. It can be used for any type of asset (including energy efficiency improvements). It includes several different Express Programs that offer “streamlined and expedited loan procedures for particular groups of borrowers,” businesses in Historically Underutilized Business Zones (HUBZones), and veteran-owned businesses. (Source: SBA website)
The Small/Rural Lender Advantage Program helps small community/rural-based lenders “promote the economic development of local communities, particularly those facing the challenges of population loss, economic dislocation, and high unemployment.”(Source: SBA website)
Pollution Control Loans “are 7(a) loans specifically designated for pollution control. The program provides financing to eligible small businesses for the planning, design, or installation of a pollution control facility. This facility must prevent, reduce, abate, or control any form of pollution, including recycling.” (Source: SBA website)
SBA’s CDC/504 Loan Program is a long-term financing tool for economic development within a community, providing long-term fixed-rate financing. It can be used for the “construction of new facilities or modernizing, renovating or converting existing facilities,” which includes energy efficiency improvements. (Source: SBA website)
However, CDC/504 loan programs may require some structuring because to qualify one must have 50% of the funds coming from a senior lender, 40% from a junior lender (e.g., a Community Development Corporation), and 10% from the borrower.
SBA’s Micro Lending Program provides small businesses with small short-term loans for under $50,000. Micro loans can only be used for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment, which may include clean energy equipment.
The 8(a) Business Development Program assists in the development of small businesses owned and operated by socially and economically disadvantaged individuals, such as women, minorities, veterans, and disabled persons.
SBA loan terms and conditions vary greatly by program. For example, SBAExpress can cover up to $350,000 with terms up to 7 years at interest rates indexed to Prime Rate, LIBOR, or the optional peg rate (published quarterly in the Federal Register). PatriotExpress, on the other hand, will finance up to $500,000. For details about individual loan programs, see the SBA website.
Because the SBA guarantees can be as high as 90% of a loan, additional credit enhancements that American Recovery and Reinvestment Act (ARRA) grantees might offer may not be particularly interesting to a third-party lending institution. Offering a lender an additional 10% or even 20% loan loss reserve on an SBA loan that is already guaranteed at 90% may not be attractive enough to entice lending partners to participate in ARRA-funded clean energy loan programs. However, some commercial lenders may find the marketing support behind an ARRA-funded energy efficiency or renewable energy loan program appealing because it helps bring more clients to their financial institution. In addition, SBA program guarantees are paperwork intensive for the lender. Some lenders may find an ARRA-funded loan loss reserve-based financing program attractive if it requires minimal paperwork.