Adequate amounts of investment capital at affordable terms are necessary if manufacturers are to modernize and compete. Plenty of capital is available nationally, but many firms have trouble borrowing money at manageable rates. This is especially true for small manufacturers, who often have great difficulty in securing financing. Many cannot obtain capital either for long-term investments in plant and equipment or short-term funds for materials to build inventory. The normal problems associated with underwriting are complicated by several factors, including lender adversity to operations involving new technologies and the uncertainties that environmental concerns bring to manufacturing projects.
Financing institutions typically limit their lending to low-risk propositions. Lenders are most comfortable with certainty, and as a result, often view innovations or new technologies as "red flag" situations to be avoided. Many small manufacturers, in fact, are not able to land long-term capital or construction loans at any price; they are viewed as too risky. Their owners often lack enough collateral to meet underwriting requirements or enough cash to meet loan processing costs and environmental assessment requirements. In particular, technological enterprises that may be praised by public and corporate leaders often are scorned by bank underwriters; innovative projects without a record of success do not compete well in financial markets.
Business Financial Needs
Industrial development proponents need to understand the different types of financing needs that manufacturers face as they go through various business cycles and as their companies evolve. No matter the operation or location, manufacturers must secure several types of credit to do business.
Finance Tools Suitable for Manufacturers
Federal agencies have devised sophisticated financing tools to reverse shortcomings in capital markets. The structure of these tools vary; some offer direct financial assistance, while others provide incentives via the tax code. Some financing tools are administered by federal agencies, others by authorized private organizations, still other by local development agencies or non-profits, in accordance with federal rules and in conjunction with federal agency partners. Most programs defray operating costs by imposing at least minimal user fees. The financing tools available to manufacturers take numerous forms, but four types predominate: grants, debt, equity, and tax incentives. The basic features of each are examined below.
Grants
Grants are direct transfers of money to the recipient, usually with no payback obligation. The average grant dollar amounts of each project are relatively low because grants are designed to help leverage other sources of financing. Many grants are cost-shared — requiring financial commitments from grant recipients. Some grants are done as "pass throughs" — federal funds are provided to an intermediary, such as a city or development organization, which, in turn, provides funds to the private company.
Debt
Most of the federal assistance to manufacturers seeks to make debt capital more available to business through loans, loan guarantees, and other types of interest subsidies. These programs either subsidize the cost of capital or help ensure its availability. Rates of interest are at or below prevailing market rates, depending on the program's objectives and constituency. These debt programs often are used to help attract capital for expansion projects or general business operation. They also seek to support promising firms that private lenders view as high risk, as well as otherwise solid companies unable to meet standard commercial lending terms.
Depending on the specific provisions of any given program, loans may be used for a variety of business capital needs — financing building construction, acquiring equipment and machinery, funding plant expansions, or support export activity. Some programs meet a company's need for working capital, chronically in short supply for smaller manufacturers. In recent years, federal loan guarantees, primarily those offered by the Small Business Administration, have proven critical to manufacturers seeking capital to incorporate new technologies.
Debt programs are designed to improve the availability and affordability of capital. Most program officials, however, follow fairly rigid guidelines to minimize risk; they are as afraid of business failure as their private-sector counterparts. As a result, capital access remains a problem for many new or small operations, despite federal attempts to improve it.
Although debt financing is the primary federal financing approach, it may not be well suited to many new or expanding business situations or to manufacturers engaged in technology-related projects. Many such firms have initial cash-flow difficulties, and debt programs require a constant stream of repayments beginning almost immediately. Manufacturers trying to modernize or diversify often must borrow considerable sums to invest in production facilities and equipment. Many small firms fail — not from lack of demand for their products or services — because they cannot meet debt installments. The time lag on accounts receivable, for instance, can cause an insurmountable cash-flow chasm for small businesses.
Equity
Equity-finance programs attempt to make capital available rather than lowering its cost. They promote development by investing funds in capital-poor but otherwise competitive enterprises, many of which are technologically innovative. Equity programs on a significant scale are a relatively new public- sector financial assistance phenomenon. At the federal level, only SBA's Small Business Investment Company (SBIC) operates as an equity assistance program.
In practice, SBA makes equity investments much like a private investor. Through its licensed SBICs, the agency takes an ownership interest in a company in exchange for funds. Equity is a riskier channel of investment than debt. If there are no profits or the business folds, the public-sector sponsor makes nothing or even loses its money. On the other hand, if the company does well, the state or SBIC can reap a substantial return.
Equity programs operate more like a stock purchase than a debt investment, structured to give a company relief from redeeming its obligation until a certain level of return is reached. In contrast to debt financing, equity usually is more "patient" money. Because returns are a function of profit, they are not expected immediately. The timing and size of payments are geared to the company's financial condition, thus removing early cash-flow pressures and giving the firm time to use its cash to advance restructuring or modernization efforts.
Tax Incentives
The only significant federal tax incentives targeted to manufacturers are tax-exempt IDBs, which can be used for a variety of financial needs, including site preparation and equipment acquisition. State and local governments offer most of the tax incentives to promote manufacturing activity, including abatements, investment incentives, exemptions or moratoriums for capital improvements, and incentives for job creation. State and local tax incentives often are linked or packaged to federal financing assistance, and it is useful for MEP officials and other economic development practitioners to understand the theory behind them. Tax incentives are offered on the premise that reducing taxes lowers the cost of doing business in an area, making it more attractive for companies to locate there or to maintain or expand existing operations. The latter rationale often is cited when long-time manufacturing companies seek help to retool. In granting a tax incentive (or by issuing an IDB), the government supports a project by foregoing future revenue rather than by giving direct assistance.
In short, public resources are used in a variety of ways to support manufacturing modernization projects and to help attract private investment. The most suitable approach depends on the specifics of any given program, the current development climate in a given area, and the financial needs of existing and prospective enterprises. It is limited only by the creativity of the participants.
Finally, despite considerable publicity on the success of public support for manufacturing competitiveness ventures, many company owners simply do not want government help, even though they need capital desperately. Many entrepreneurs and even seasoned manufacturers fear government meddling. Although release or leaks of proprietary information to the public domain are rare, the prospect of giving a research or procedural advantage to competitors remains a major concern. These concerns of manufacturers must be kept in mind when considering any types of assistance to recommend.
Ten federal financial assistance programs are profiled on the following pages. Although varied, they largely fall into three categories: direct loans; loan guarantees (by far the largest in terms of total available resources); and equity investments. Also included are tax-exempt industrial development bonds.
| Objective: | To provide loan guarantees to creditworthy small businesses unable to obtain financing from private lenders. |
| Eligibility: | Small, independently-owned businesses that are not dominant in their fields; size limitations vary from industry to industry (typically capped at 500 employees). |
| Cost: | Interest rate generally is not more than 2.75 percentage points above the prime lending rate; some fees involved, generally 2 percent of loan guarantee. |
| Services: | Financial assistance in the form of loan guarantees. |
Description
The Small Business Administration's (SBA) Section 7(a) Loan Guarantee program helps meet the financing needs of creditworthy small businesses, including manufacturers, that face various problems when dealing with commercial bankers. These firms often are denied conventional financing because they seek loans that are too small for private banks to pursue (since the return to the lender would not make them financially worthwhile). In other cases, companies need loans for a longer period of time than a lender is willing to make. Some firms, notably start-ups and exporters, find it difficult to secure private financing for on-going lines of credit.
The 7(a) loan program may guarantee loans used for virtually any business purpose. In essence, it reduces lenders' risks and costs by guaranteeing that the commercial lender will receive a significant portion of the unpaid loan principal if the business borrower defaults. Bank loans of up to $155,000 are guaranteed at 90 percent; loans exceeding $150,000 are guaranteed at 85 percent. Most Section 7(a) guarantees are limited to a maximum of $500,000, but the typical request is much smaller. For the first half of 1995, the average size was $152,733. Loan guarantee terms vary, depending on the use of the money. Loans for fixed- asset acquisition have a maximum guaranteed maturity of 25 years; loans for general-purpose working capital needs are covered for seven years.
The SBA makes no cash payments to a lender, unless the borrower fails to meet repayment obligations. The Section 7(a) program receives a fixed amount of congressional appropriations annually to cover loan losses, which translates into "lending authority," the total amount of loans that the agency can guarantee during a given fiscal year.
Small businesses are eligible if they are independently owned and not considered "dominant" in their industry. Generally, the SBA defines a manufacturer as a small business if it has less than 500 employees (the number can be as high as 1,500 workers, depending on the industry). About one third of SBA's 7(a) loans in 1995 helped service-sector businesses; another 30 percent supported retail operations. Manufacturers secured only 14 percent of the total number of guarantees.
Application Process
Private lenders initiate and control the loan application process, determining which projects can be financed with the SBA's backing. A small business applies to its own private lender, following that institution's criteria. The lender examines the loan application package, evaluating it for credit-worthiness and other risks. If the lender decides that the project needs the additional security of an SBA guarantee to make it viable, the institution forwards the application package (along with Section 7(a) program paperwork) to the agency for approval. In its review, the SBA considers whether the applicant has sufficient cash flow to pay its ongoing obligations, including repayment of the requested loan. It also considers the applicant's credit history and available collateral. If the SBA approves the 7(a) guarantee application, it notifies the bank, which disburses the loan proceeds to, and collects payments from, the borrower. In the event of a default, the lender intervenes with the SBA for compensation.
The 7(a) guarantee program has important potential for industrial projects. While lenders forward applications to the SBA, it is important for technical assistance providers to remember that they can suggest this route to manufacturers, who in turn can approach their lenders about this option. Although the program is widespread, many bankers may not be familiar with it; in some cases, companies could benefit from a referral to a financial institution experienced with SBA programs.
Impact
The goal of the 7(a) program is to increase small companies' access to capital. Since the creation of the SBA in 1953, the agency has guaranteed approximately 603,000 loans through the 7(a) program, with a total value of $80 billion. The number of 7(a) guarantees has increased steadily in recent years — from 19,570 in 1991 to 45,635 for the first half of 1995. At the same time, the average loan size has been decreasing — as SBA tries to link lenders and prospective borrowers with smaller capital needs — from $250,960 in the peak year of 1993 to $152,733 in 1995.
Guaranteed Loans
| Year | Number | Total Value | Size |  |
| 1991 | 19,570 | $4.38 billion | $223,812 | |
| 1992 | 24,284 | $5.93 billion | $244,193 | |
| 1993 | 26,812 | $6.73 billion | $250,960 | |
| 1994 | 36,480 | $8.17 billion | $224,122 | |
| 1995* | 45,635 | $6.97 billion | $152,733 | |
| *thru July 21, 1995 SOURCE: Small Business Administration |
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1) BGW Systems, Inc., located in Hawthorne, California, manufactures professional audio amplifiers. In the early 1990s, the company needed working capital to finance expansion into international markets. BGW applied for and received a $200,000 loan, guaranteed under the Section 7(a) program. The proceeds allowed the company to purchase needed raw materials and inventory, and to hire the workers it needed to tap prospective foreign markets. Today, exports account for 60 percent of BGW's sales.
2) The Genetic Toxology Lab in Stafford, Texas, developed and now produces a line of nutritional products that cater to the needs of local doctors. The company, which barely broke even when it opened its doors in 1975, achieved $1 million in sales in 1984, and reached $2 million by 1992. As the company grew, it needed capital in order both to increase its inventory and to acquire expensive, high-technology production equipment. In 1992, Genetic Toxology Lab applied to its local lender and subsequently received a $750,000 loan guaranteed by the SBA. With the needed capital, the company has continued to grow. Today, it has expanded its product line and increased sales to more than $3 million.
Future Prospects
The 104th Congress is considering proposals to reauthorize all SBA programs. As of late October 1995, pending legislation (S. 895) had emerged from a House-Senate conference and included a number of changes to the Section 7(a) loan guarantee program. The conference agreement would lower the level of federal guarantee to 80 percent of loans up to $100,000 and 75 percent of loans over $100,000. Guarantee fees would rise from the current two percent level, on a sliding scale pegged to loan size. Loans less than $250,000 would now be subject to a three percent fee; portions of loans between $250,000 and $500,000, a 3.5 percent fee; and portions of loans greater than $500,000, a 3.875 percent fee. S. 895 also authorizes the SBA to collect a fee for any loan guarantee sold into the secondary market.
Contacts
A company's first point of contact is typically the local private lender. Financial institutions work directly with SBA district offices. Firms wishing to investigate the process on their own can contact the local SBA district office, which can counsel potential borrowers on other available programs, make referrals to local participating banks, and provide general assistance to small business owners. A list of SBA district offices follows. Small Business Development Centers (SBDCs) also can help small business owners put together business plans and loan applications, as well as provide technical and managerial assistance necessary to complete a successful application (see also the SBDC profile description of services, locations, and phone numbers.) The SBA provides a toll-free number (1-800-U-ASK-SBA; TDD users, 202-205-7333) to provide general program information. General information also is available through SBA on-line services, at the numbers and address listed below.
Director, Loan Policy and Procedures Branch
Small Business Administration
409 Third Street, SW
Washington, D.C. 20416
202-205-6570
SBA Bulletin Board:
1-800-697-4636 (outside D.C.)
Internet Address:
telnet://sbaonline.sba.gov
http://www.sbaonline.sba.gov
Small Business Administration District, Branch, and Post-of-Duty Offices (as of October 1995) ALABAMA SBA District Office 2121 8th Ave., N., Suite 200 Birmingham, AL 35203-2398 205-731-1344 (voice) 205-731-2265 (TDD) ALASKA SBA District Office 222 W. 8th Ave., Room 67 Anchorage, AK 99513-7559 907-271-4022 (voice) 907-271-4005 (TDD) ARIZONA SBA District Office 2828 N. Central Ave, Suite 800 Phoenix, AZ 85004-1025 602-640-2316 (voice) 602-640-2357 (TDD) SBA District Office 300 W. Congress St., Rm 7-H Tucson, AZ 85701-1319 602-670-4759 (voice) ARKANSAS SBA District Office 2120 Riverfront Dr., Suite 100 Little Rock, AR 72202 501-324-5278 (voice) 501-324-7849 (TDD) CALIFORNIA SBA District Office 2719 N. Air Fresno Dr. Fresno, CA 93727-1547 209-487-5189 (voice) 209-487-5917 (TDD) SBA District Office 330 N. Brand Blvd., Suite 1200 Glendale, CA 91203-2304 213-894-2956 (voice) 213-894-6338 (TDD) SBA District Office 880 Front St., Suite 4-S-29 San Diego, CA 92188-0270 619-557-7252 (voice) 619-557-6998 (TDD) SBA District Office 211 Main St., 4th Floor. San Francisco, CA 94105-1988 415-744-6820 (voice) 415-744-6778 (TDD) SBA District Office 901 W. Civic Center Drive, Suite 160 Santa Ana, CA 92703-2352 714-836-2494 (voice) 714-836-2200 (TDD) SBA District Office 660 J St., Rm. 215 Sacramento, CA 95814-2413 916-551-1426 (voice) SBA District Office 6477 Telephone Rd., Suite 10 Ventura, CA 93003-4459 805-642-1866 (voice) COLORADO SBA District Office 721 19th St., Ste. 426 Denver, CO 80202-2259 303-844-3984 (voice) 303-844-5638 (TDD) CONNECTICUT SBA District Office 330 Main St., 2nd Floor. Hartford, CT 06106 203-240-4700 (voice) 203-524-1611 (TDD) DISTRICT OF COLUMBIA SBA District Office 1110 Vermont Ave., NW, Suite 900 Washington, DC 20036 202-606-4000 (voice) DELAWARE SBA District Office 920 N. King St., Suite 412 Wilmington, DE 19801 302-573-6295 (voice) 302-573-6644 (TDD) FLORIDA SBA District Office 1320 S. Dixie Hwy, Suite 501 Coral Gables, FL 33146-2911 305-536-5521 (voice) 305-530-7110 (TDD) SBA District Office 7825 Baymeadows Way, Suite 100-B Jacksonville, FL 32256-7504 904-443-1900 (voice) 904-443-1909 (TDD) SBA District Office 501 E. Polk St., Ste. 104 Tampa, FL 33602-3945 813-228-2594 (voice) SBA District Office 5601 Corporate Way, Suite 402 West Palm Beach, FL 33407 407-689-3922 (voice) GEORGIA SBA District Office 1720 Peachtree Road, NW Sixth Floor Atlanta, GA 30309 404-347-4749 (voice) 404-347-0107 (TDD) SBA District Office 52 N. Main St., Rm. 225 Statesboro, GA 30458 912-489-8719 (voice) HAWAII SBA District Office 300 Ala Moana Blvd, Rm 2213 Honolulu, HI 96850-4981 808-541-2990 (voice) 808-541-3650 (TDD) IDAHO SBA District Office 1020 Main St., Ste. 290 Boise, ID 83702-5745 208-334-1696 (voice) 208-334-9637 (TDD) ILLINOIS SBA District Office 500 W. Madison St., Rm. 1250 Chicago, IL 60661-2511 312-353-4528 (voice) SBA District Office 511 W. Capitol St, Suite 302 Springfield, IL 62704 217-492-4416 (voice) 217-492-4418 (TDD) INDIANA SBA District Office 429 N. Pennsylvania, Suite 100 Indianapolis, IN 46204-1873 317-226-7272 (voice) 317-226-5338 (TDD) IOWA SBA District Office 373 Collins Rd., NE, Suite 100 Cedar Rapids, IA 52402-3147 319-393-8630 (voice) 319-393-9610 (TDD) SBA District Office 210 Walnut St., Rm. 749 Des Moines, IA 50309 515-284-4422 (voice) 515-284-4233 (TDD) KANSAS SBA District Office 100 E. English St., Suite 510 Wichita, KS 67202 316-269-6273 (voice) 316-269-6205 (TDD) KENTUCKY SBA District Office 600 Dr. M.L. King Jr. Place, Rm 188 Louisville, KY 40202 502-582-5971 (voice) 502-582-6715 (TDD) LOUISIANA SBA District Office 1661 Canal St., Suite 2000 New Orleans, LA 70112 504-589-6685 (voice) 504-589-2053 (TDD) SBA District Office 500 Fannin St., Rm 8A-08 Shreveport, LA 71101 318-676-3196 (voice) MAINE SBA District Office 40 Western Ave., Room 512 Augusta, ME 04330 207-622-8378 (voice) 207-626-9147 (TDD) MARYLAND SBA District Office 10 S. Howard St, Room 608 Baltimore, MD 21202 410-962-4392 (voice) MASSACHUSETTS SBA District Office 10 Causeway St., Room 265 Boston, MA 02222-1093 617-565-5590 (voice) 617-565-5797 (TDD) SBA District Office 1550 Main St., Rm. 212 Springfield, MA 01103 413-785-0268 (voice) MICHIGAN SBA District Office 477 Michigan Ave., Rm 515 Detroit, MI 48226 313-226-6075 (voice) 313-226-2958 (TDD) SBA District Office 228 West Washington St., Room 11 Marquette, MI 49885 906-225-1108 (voice) 906-228-4126 (TDD) MINNESOTA SBA District Office 100 N. Sixth St, Suite 610 Minneapolis, MN 55403-1563 612-370-2324 (voice) 612-777-2332 (TDD) MISSISSIPPI SBA District Office 101 W. Capitol St., Suite 400 Jackson, MS 39201 601-965-4378 (voice) 601-965-5328 (TDD) SBA District Office 1 Hancock Plaza, Suite 1001 Gulfport, MS 39501-7758 601-863-4449 (voice) 601-865-9926 (TDD) MISSOURI SBA District Office 323 W. Eighth St., Suite 501 Kansas City, MO 64105 816-374-6708 (voice) 816-374-6764 (TDD) SBA District Office 815 Olive St., Rm. 242 St. Louis, MO 63101 314-539-6600 (voice) 314-539-6654 (TDD) SBA District Office 620 S. Glenstone St., Suite 110 Springfield, MO 65802-3200 417-864-7670 (voice) 417-864-8855 (TDD) MONTANA SBA District Office 301 S. Park, Rm. 528 Helena, MT 59626 406-449-5381 (voice) 406-449-5053 (TDD) NEBRASKA SBA District Office 11145 Mill Valley Road Omaha, NE 68154 402-221-4691 (voice) NEVADA SBA District Office 301 E. Stewart St., Room 301 Las Vegas, NV 89125-2527 702-388-6611 (voice) SBA District Office 50 S. Virginia St., Room 238 Reno, NV 89505-3216 702-784-5268 (voice) NEW HAMPSHIRE SBA District Office 143 N. Main St., Suite 202 Concord, NH 03302-1257 603-225-1400 (voice) 603-225-1462 (TDD) NEW JERSEY SBA District Office 60 Park Place, 4th Floor. Newark, NJ 07102 201-645-2434 (voice) 201-645-4653 (TDD) SBA District Office 2600 Mt. Ephraim Ave. Camden, NJ 08104 609-757-5183 (voice) NEW MEXICO SBA District Office 625 Silver Ave., SW, Suite 320 Albuquerque, NM 87102 505-766-1870 (voice) 505-766-1883 (TDD) NEW YORK SBA District Office 26 Federal Plaza, Rm 3100 New York, NY 10278 212-264-2454 (voice) 212-264-9147 (TDD) SBA District Office 100 S. Clinton St., Rm 1071 Syracuse, NY 13260 315-423-5383 (voice) 315-423-5723 (TDD) SBA District Office 111 W. Huron St., Rm 1311 Buffalo, NY 14202 716-846-4301 (voice) 716-846-3248 (TDD) SBA District Office 333 E. Water St., 4th Floor Elmira, NY 14901 607-734-8130 (voice) 607-734-0557 (TDD) SBA District Office 35 Pinelawn Rd, Rm 102E Melville, NY 11747 516-454-0750 (voice) SBA District Office 100 State St., Rm. 410 Rochester, NY 14614 716-263-6700 (voice) SBA District Office Corner of Clinton & Pearl, Room 815 Albany, NY 12207 518-472-6300 (voice) NORTH CAROLINA SBA District Office 200 N. College St. Charlotte, NC 28202 704-344-6563 (voice) 704-344-6640 (TDD) NORTH DAKOTA SBA District Office 657 Second Ave, N., Rm 218 Fargo, ND 58108-3086 701-239-5131 (voice) 701-239-5657 (TDD) OHIO SBA District Office 1240 E. Ninth St, Rm 317 Cleveland, OH 44199 216-522-4180 (voice) 216-522-8350 (TDD) SBA District Office 2 Nationwide Plaza, Ste 1400 Columbus, OH 43215-2592 614-469-6860 (voice) 614-469-6684 (TDD) SBA District Office 525 Vine St, Ste 870 Cincinnati, OH 45202 513-684-2814 (voice) 513-684-6920 (TDD) OKLAHOMA SBA District Office 200 N.W. Fifth St, Ste 670 Oklahoma City, OK 73102 405-231-4301 (voice) OREGON SBA District Office 222 S.W. Columbia, Ste 500 Portland, OR 97201-6605 503-326-2682 (voice) 503-326-2591 (TDD) PENNSYLVANIA SBA District Office 475 Allendale Rd, Suite 201 King Of Prussia, PA 19406 215-962-3804 (voice) 215-962-3806 (TDD) SBA District Office 960 Penn Ave., 5th Floor. Pittsburgh, PA 15222 412-644-2780 (voice) 412-644-5143 (TDD) SBA District Office 100 Chestnut St, Rm 309 Harrisburg, PA 17101 717-782-3840 (voice) 717-782-3477 (TDD) SBA District Office 20 N. Pennsylvania Ave., Rm. 2327 Wilkes-Barre, PA 18702 717-826-6497 (voice) 717-821-4174 (TDD) RHODE ISLAND SBA District Office 380 Westminster Mall, 5th Floor Providence, RI 02903 401-528-4561 (voice) 401-528-4690 (TDD) SOUTH CAROLINA SBA District Office 1835 Assembly St, Rm 358 Columbia, SC 29201 803-765-5376 (voice) SOUTH DAKOTA SBA District Office 101 S. Main Ave. Sioux Falls, SD 57102 605-330-4231 (voice) 605-331-3527 (TDD) TENNESSEE SBA District Office 50 Vantage Way, Suite 201 Nashville, TN 37228-1500 615-736-5881 (voice) 615-736-2499 (TDD) TEXAS SBA District Office 4300 Amon Carter Blvd Suite 114 Fort Worth, TX 76155 817-885-6500 (voice) 817-885-6552 (TDD) SBA District Office 10737 Gateway West, Suite 320 El Paso, TX 79935 915-540-5676 (voice) 915-540-5196 (TDD) SBA District Office 222 E. Van Buren Street Room 500 Harlingen, TX 78550 512-427-8533 (voice) 512-423-0691 (TDD) SBA District Office 9301 Southwest Freeway Suite 550 Houston, TX 77074-1591 713-773-6500 (voice) 713-773-6568 (TDD) SBA District Office 1611 10th St., Ste. 200 Lubbock, TX 79401 806-743-7462 (voice) 806-743-7474 (TDD) SBA District Office 7400 Blanco Road, Suite 200 San Antonio, TX 78216-4300 512-229-4535 (voice) 512-229-4555 (TDD) SBA District Office 606 N. Carancahua, Suite 1200 Corpus Christi, TX 78476 512-888-3331 (voice) 512-888-3188 (TDD) SBA District Office 4300 Amon Carter Blvd, Suite 114 Ft. Worth, TX 76155 817-885-6500 (voice) SBA District Office 300 E. Eighth St, Room 520 Austin, TX 78701 512-482-5288 (voice) SBA District Office 505 E. Travis, Rm. 103 Marshall, TX 75670 903-935-5257 (voice) UTAH SBA District Office 125 S. State St, Rm 2237 Salt Lake City, UT 84138-1195 801524-5804 (voice) 801-524-4040 (TDD) VERMONT SBA District Office 87 State St., Rm. 205 Montpelier, VT 05602 802-828-4422 (voice) 802-828-4552 (TDD) VIRGINIA SBA District Office 400 N. Eighth St, Rm 3015 Richmond, VA 23240 804-771-2400 (voice) 804-771-8078 (TDD) WASHINGTON SBA District Office 915 Second Ave, Rm 1792 Seattle, WA 98174-1088 206-553-1420 (voice) 206-553-6809 (TDD) SBA District Office W. 601 First Ave, 10th Floor E. Spokane, WA 99204-0317 509-353-2800 (voice) 509-353-2424 (TDD) WEST VIRGINIA SBA District Office 168 W. Main Street Fifth Floor Clarksburg, WV 26301 304-623-5631 (voice) 304-623-5616 (TDD) SBA District Office 550 Eagan St., Rm. 309 Charleston, WV 25301 304-347-5220 (voice) 304-347-5438 (TDD) WISCONSIN SBA District Office 212 E. Washington Ave. Room 213 Madison, WI 53703 608-264-5261 (voice) 608-264-5333 (TDD) SBA District Office 301 W. Wisconsin Ave. Suite 400 Milwaukee, WI 53203 414-297-3941 (voice) 414-297-1095 (TDD) WYOMING SBA District Office 100 E. B St., Rm. 4001 Casper, WY 82602-2839 307-261-5761 (voice) 307-261-5806 (TDD)
| Objective: | To provide small business loan guarantees of up to $100,000, using a simplified single-page application form. |
| Eligibility: | Small, independently-owned businesses that are not dominant in their fields; size limitations vary from industry to industry (typically capped at 500 employees). |
| Cost: | No application fee; SBA processing fees, up to 2 percent of guarantee value, may be assessed. |
| Services: | Financial assistance in the form of loan guarantees. |
Description
The Low Documentation (LowDoc) Loan Guarantee program was launched by the Small Business Administration (SBA) in December 1993 as a limited pilot spin-off of the Section 7(a) Loan Guarantee program. LowDoc was devised to encourage more lenders to consider handling SBA-backed loans of $100,000 or less. It streamlines the application process by using a single-page SBA form and providing a rapid response from the SBA — usually within a few days. After a successful pilot in which the number of Section 7(a) guarantees for loans under $100,000 increased dramatically, the SBA elevated LowDoc to full program status in December 1994. In mid-1995, Vice President Albert Gore's National Performance Review recognized LowDoc's achievements in cutting red tape as part of SBA's "reinventing government" strategy.
LowDoc guaranteed loans cannot exceed $100,000, and all receive a 90 percent guarantee under the SBA's Section 7(a) authority. Interest rates are tied to the prime rate and negotiated between the applicant and the lender. They cannot exceed SBA maximums — not more than 2.25 percentage points over prime for loans of less than seven years duration, and not more than 2.75 percentage points over prime for loans greater than seven years. Loans under $50,000 may be subject to slightly higher rates. The acceptable loan term depends on the borrower's ability to repay and how the loan proceeds will be used, but it may not exceed 25 years for fixed assets or ten years for all other uses.
Application Process
LowDoc application procedures are identical to those for the Section 7(a) loan guarantee program, and private lenders play a dominant role. Prospective borrowers submit loan requests to their local bank, providing any documentation that the institution may require. The lender examines the application according to its own risk policies. If the bank decides it cannot approve the loan without the security of an SBA guarantee, the lender and potential borrower fill out a single-page application form and forward it to the local SBA district office for review, along with the bank's own loan analysis. (Click here to download the SBA Loan Application Form 4-L in Adobe Acrobat format). For loans over $50,000, the borrower also must include copies of U.S. Income Tax Schedule C or the front page of the corporate or partnership returns for the past three years, as well as personal financial statements.
Agency officials rely on the participating financial institution to scrutinize the application. The SBA reviews the character, credit, and experience of the applicant, rather than more traditional issues of cash flow and available collateral. If the SBA approves the loan guarantee, the lender disburses the funds and collects payments from the borrower. The SBA tries to provide quick turnaround on LowDoc applications; the agency's process usually takes between a few days to two weeks, depending on local SBA office case loads.
The SBA stresses that all loans are to be adequately secured, but guarantees generally will not be declined when inadequate collateral is the only unfavorable factor. Normally, business assets are pledged, and occasionally personal holdings. Principals must provide personal guarantees. Since the inception of the LowDoc program, the average loan guarantee has been $54,000, with an average term of five years.
Impact
The LowDoc program has simplified the SBA guarantee process. It has encouraged more lenders to meet a key business capital need by making loans under $100,000. This initiative also has led more small businesses to consider such loans for start-up, modernization, or expansion. In 1994, the program's first full year, the SBA guaranteed 5,862 loans totaling $315.8 million. LowDoc is experiencing explosive growth in 1995, as lenders and businesses become more familiar with it. In fact, some SBA district offices have reported that as much as two thirds of their guarantee activity is comprised of LowDoc applications. Through the first half of the year, the SBA has guaranteed 25,373 LowDoc loans, with a value of $1.41 billion. Loan guarantees under $100,000, those most used by small businesses, increasingly have become a bigger part of the SBA's portfolio. From 1991 through 1993, before the pilot of LowDoc, less than a third — about 7,000 — of the loans guaranteed by SBA were under $100,000. With the development of LowDoc, more than 65 percent — 29,435 — of the loans guaranteed in the first half of 1995 were under $100,000.
Number of SBA Loan Guarantees Under $100,000
| Fiscal Year | Number of Loans Under $100,000 |
Percent of Loans Under $100,000 |
 |
| 1991 | 6,364 | 33 | |
| 1992 | 7,562 | 31 | |
| 1993 | 7,942 | 30 | |
| 1994 | 13,612 | 37 | |
| 1995* | 29,435 | 65 | |
| *thru July 21, 1995 SOURCE: Small Business Administration |
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Success Stories
1) Two Monroe, Connecticut, residents wanted to go into business for themselves when the opportunity arose to buy a machine shop. One had worked for 12 years in manufacturing as a machinist and programmer. To get the business started, they needed about $100,000 to purchase machines and cover initial working capital needs. After approaching several banks, they were unable to secure financing. They finally approached the Naugatuck Savings Bank, whose officials made them aware of the LowDoc program. With the backing of the SBA guarantee, they were able to secure the needed loan. Today they operate AP&P, Inc., a manufacturing company offering machining, programming, product design, production development services for small component parts and prototype development.
2) Nash Patel, the president and owner of D.N. America, a software engineering and computer services firm in Fairmont, West Virginia, attributes much of his company's success to SBA assistance. After working for organizations such as AT&T Bell Labs and Unisys Corporation, Mr. Patel decided to start D.N. America. To attain the capital necessary for start-up costs, he sought about $100,000 in financing through his private lender. The loan was deemed viable because of the SBA guarantee, available through the LowDoc program. D.N. America has continued to use other SBA services, including business-development training, consultant services, and contract and procurement assistance.
Future Prospects
All SBA programs are being reviewed by the 104th Congress, as part of the legislative reauthorization process. Since LowDoc's guarantee authority is linked to the larger Section 7(a) program, it will be subject to the same legislative changes proposed in S. 895, which emerged in October 1995 from a House-Senate conference. Most significant for LowDoc is the House proposal to reduce to 80 percent guarantee levels for loans of less than $100,000, which could effect the level of interest banks have in participating in the program. In addition, the increase in fees from two percent to three percent would affect LowDoc guarantees. All LowDoc projects fall below the $250,000 threshold that triggers an even greater rise in guarantee fees.
Contact
Private lenders are the primary contacts for the LowDoc Loan Guarantee program. The SBA district offices, however, can alert and counsel potential borrowers on available assistance, make referrals to local participating banks, and provide general guidance to small business owners. A list of the SBA district offices can be found following the Section 7(a) loan guarantee profile. Small Business Development Centers (SBDC) also can help small business owners with technical and managerial assistance needed to apply for program assistance (see the SBDC profile for a description of services, locations, and phone numbers). The SBA provides a toll-free number (1-800-U-ASK-SBA; TDD users, 202-205-7333) for general program information. In addition, information is available through SBA on-line services. The numbers and address are listed below.
SBA Bulletin Board:
1-800-697-4636 (outside D.C.)
401-9600 (D.C. access)
Internet Address:
telnet://sbaonline.sba.gov
http://www.sbaonline.sba.gov
Certified Development Company Guaranteed Loans (Section 504)
| Objective: | To provide long-term, fixed-rate financing for small business fixed assets. |
| Eligibility: | Small, independently-owned businesses that are not dominant in their fields; size limitations vary from industry to industry (typically capped at 500 employees). |
| Cost: | No federally-established application costs; individual CDCs may impose application and servicing fees. |
| Services: | Financial assistance in the form of guaranteed loans. |
Description
The Certified Development Company Guaranteed Loan program, also known as the Small Business Administration's (SBA) Section 504 program, helps small businesses finance fixed assets — acquisition of land, buildings, and machinery, as well as construction, renovation, and expansion of existing facilities and leasehold improvements. The program is operated through SBA-licensed Certified Development Companies (CDCs), private organizations chartered to channel investment capital to small and mid-sized enterprises. CDCs work to identify potential business participants, perform credit analyses, recommend loan approval, and close and service loans that they initiate. The 280 CDCs nationwide raise their capital for relending through the sale of debentures to private investors, with the SBA guaranteeing the debenture's repayment.
CDCs broker 504 loans according to rules established by the SBA. Each debenture sold covers a specific small business project. All debentures must be collateralized to the extent that the SBA deems reasonable to assure repayment. A 504 loan may not exceed $750,000 unless "significant public policy goals" are involved; then, it can reach $1 million. Acceptable goals include: increasing exports, improving the environment, developing high technology, expanding minority business opportunities, revitalizing downtowns and other business districts, and improving the economy of a rural area. Since 1991, the average CDC-administered 504 loan totaled $307,700.
A small business project backed by a Section 504 guaranteed loan features a three-part financing package:
A Section 504 loan can mature in either ten or 20 years. If the maturity is ten years, the private financing must extend for a term of at least seven years; if the 504 assistance runs for 20 years, then the private participation must be for at least ten years. The interest rate for 504 loans, determined periodically by the SBA, is fixed for the term of the loan and typically is slightly lower than market rates.
Application Process
All Section 504 loan guarantees must be channeled through a CDC, which makes the initial determination whether to proceed with the project. Applicants must work with a CDC to fill out SBA Form 1244. Once the CDC approves the firm's proposal, it submits the application to the local SBA district office. The participating CDC must prepare a statement outlining the project and proposed use of loan proceeds, the source of funds for the third part of the financing package (the 10 percent, often termed the "local injection"), and how it proposes to service the loan. CDCs also must make sure that applicant firms create or retain at least one job for each $35,000 in 504 assistance received. The SBA district office tries to rule on the loan application within three weeks of receiving it, the SBA notifies the CDC of its ruling.
Impact
In fiscal year 1993, the SBA approved 2,454 applications, with a total value of $813.8 million. Since 1980, more than $13 billion in Section 504 financing has been provided to 17,404 small businesses. The SBA estimates that, as a result of this program, approximately 373,000 jobs have been created or saved by 504 loan guarantees during that time.
Success Stories
1) The president of Dimension Industries, Inc., in Minnesota wanted to enlarge his company, which designs and manufactures packaging instruments and fixture equipment. With the help of the Section 504 loan program, he obtained sufficient financing to purchase a $2 million facility with 84,000 square feet, more than tripling the size of his former plant.
2) Brown and Sons Printing, Inc., of Montpelier, Vermont, began as a family printing business in 1988 with no client base. Six years later, it had more than 1,000 clients, and the Browns decided to move out of the 1,120 square-foot barn that housed the original operation and to purchase a 22,000 square-foot plant. The Northfield Savings Bank acted as the primary lender with the Vermont Economic Development Authority provided the 10 percent local cash injection that allowed the project to go forward. Today, the company has grown to 27 employees and looks to continue its expansion.
Future Prospects
Congress currently is reviewing all SBA programs as part of its reauthorization process. The House-Senate conference agreement on S. 895 would direct SBA to collect an annual fee from the borrower equal to 0.125 percent of the outstanding balance of the Section 504-backed loan. These fees are to be used to offset the cost of making guarantees under this program.
Contacts
The SBA district offices or Small Business Development Centers (SBDCs) are good initial contacts for information on the Section 504 program. They can pinpoint CDC locations and link prospective business participants with the appropriate staff, as well as provide general loan applications and other forms. A list of SBA district offices can be found following the Section 7(a) loan guarantee profile on page 10. See the SBDC profile for a description of this program's services, locations, and phone numbers. In addition, an interested manufacturer can contact the Office of Rural Affairs and Economic Development at the SBA at the number below or call SBA's toll-free number (1-800-U-ASK-SBA; TDD users, 202-205-7333). General information also is available through SBA on-line services, at the numbers and address listed below.
Office of Rural Affairs and Economic Development
Small Business Administration
409 3rd Street, SW
Washington, D.C. 20416
202-205-6485
SBA Bulletin Board:
1-800-697-4636 (outside D.C.)
401-9600 (D.C. access)
Internet Address:
telnet://sbaonline.sba.gov
http://www.sbaonline.sba.gov