What federal-level financial assistance programs are available to my New Jersey business?
U.S. Small Business Administration Programs
The U.S. Small Business Administration (SBA) is the largest source of long-term small business financing in the nation. The New Jersey District office ranks as one of the country’s top SBA lending offices.
In order to determine whether you qualify, or if an SBA business loan best suits your financing needs, please read the following carefully. For more details on the SBA and its programs, visit its Web site at www.sba.gov/nj.
The 7(a) Loan Guaranty Program
The 7(a) Loan Guaranty Program is the SBA’s primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on equity favorable terms.
The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs. When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty.
The lender may then request an SBA guaranty. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lending institution for a substantial portion of its loss.
By providing this guaranty, the SBA is able to help tens of thousands of small businesses every year get financing they would not otherwise obtain.
To qualify for an SBA guaranty, a small business must meet the 7(a) criteria and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty.
The SBA can then guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. While loan amounts and guaranty percentages vary among different types of SBA 7(a) loans, the maximum 7(a) loan amount is $2 million.
The maximum amount of an SBA guaranty is $1.5 million. Borrowers seeking funding for larger projects may wish to consider the SBA’s “504” Loan Program which has higher loan limits.
How it Works
A borrower submits a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office.
SBA’s review and approval process is streamlined for the Certified & Preferred Lenders program and the SBA Express lenders. After SBA approval, the lending institution closes the loan and disburses the funds.
Monthly loan payments are made directly to the lender. As with any loan, the borrower is responsible for repaying the full amount due.
Use of Proceeds
A borrower can use a 7(a) loan to: expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivables and augment working capital; refinance existing debt if certain conditions are met; finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.
Terms, Interest Rates and Fees
The length of time for repayment depends on the use of the proceeds and the ability of your business to repay: usually five to seven years for working capital and up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment.
Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25 percent over the lowest prime rate (as published in the Wall Street Journal) for loans with maturities of less than seven years and up to 2.75 percent above prime for maturities of seven years or longer.
For loans under $50,000, the maximum rate must not exceed prime plus 3.25 percent if the maturity is less than seven years and prime plus 3.75 percent if the maturity is seven years or more. For loans of $25,000 or less, the maximum interest rate must not exceed prime plus 4.25 percent if the maturity is less than seven years, and prime plus 4.75 percent, if the maturity is seven years or more.
The SBA charges the lender a nominal fee to provide a guaranty and the lender may pass this charge on to the borrower. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with maturity of one year or less, the fee is just 0.25 percent of the guaranteed portion of the loan.
On loans with maturities of more than one year, the guaranty fee is 2 percent on loans up to $150,000; 3 percent on loans of $150,000 to $700,000; and 3.5 percent on loans over $700,000. For loans greater than $1 million, an additional .25 percent guaranty fee will be charged for that portion greater than $1 million. That is, the portion up to $1 million would be charged a 3.5 percent guaranty fee, with the portion over $1 million being charged 3.75 percent.
Borrowers must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business.
Liens on personal assets of the principals may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.
Businesses generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years. Loans cannot be made to businesses engaged in speculation or investment.
Small Business Size Standards
• Manufacturing – Majority at 500 employees; some industries at 750 to 1,500 employees
• Wholesaling - 100 employees
• Services – most common standard is average annual receipts not to exceed $6.5 million; some specialized services at $21 million to $27 million in sales
• Retailing – most common standard is average annual receipts not to exceed $6.5 million; several retail businesses at $19.9 million to $25 million in sales
• General construction - average annual receipts not to exceed $ 31 million
• Special trade construction - average annual receipts not to exceed $13 million
• Agriculture – most common standard is average annual receipts not to exceed $750,000; some groups at $1.5 million at $11.5 million in sales
Applying for a loan
When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan proposal and application; you may not get a second opportunity.
Always begin your proposal with a cover letter or executive summary. Keep this cover page simple and direct. When writing your proposal, don’t assume the reader is familiar with your industry or your individual business. Always include industry-specific details so your reader can understand how your particular business is run and what industry trends affect it.
Documentation requirements vary with each lender. Be sure to contact them for the specific information you must supply.
Common requirements include the following:
• Purpose of the loan
• History of the business
• Financial statements for three years (existing businesses)
• Schedule of term debts (existing businesses)
• Aging of accounts receivable and payable (existing businesses)
• Projected opening day balance sheet (new businesses)
• Lease details
• Amount of investment in the business by the owner(s)
• Projections of income, expenses and cash flow
• Signed personal financial statements
• Personal résumé(s)
What the SBA Looks For
In addition to documentation needed, the SBA needs to know more about you and your plan to be sure that planning and thorough forethought has been given to your enterprise. The SBA looks for the following elements to aid them in their risk assessment:
• Good character
• Management expertise and commitment necessary for success
• Sufficient funds, including the SBA guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to meet start-up expenses and the initial operating phase)
• Feasible business plan
• Adequate equity or investment in the business
• Sufficient collateral
• Ability to repay the loan on time from the projected operating cash flow
Specialized Programs Under 7(A)
There are a number of special loan guaranty programs under the 7(a) program that address specific needs of start-up or established businesses.
They are governed, for the most part, by the same rules, regulations, fees, interest rates, etc., as the regular 7(a) loan guaranty. Your lender can advise you of any variations.
SBAExpress provides additional incentives to lenders to make small business loans. Participating banks use their own documentation and procedures to approve and service loans of up to $350,000. In return, the SBA guarantees up to 50 percent of each loan and provides expedited processing, often approving applications within 36 hours. SBAExpress also provides revolving lines of credit of up to $350,000 for terms of up to seven years.
Low Documentation Loan (LowDoc)
For small business loans of $150,000 or less, LowDoc features a one-page SBA application, cutting the paperwork burden for both small businesses and lending institutions.
Once the applicant has satisfied the lender’s requirements, the lender and applicant together complete the SBA’s one-page guaranty application. If approved, the SBA guarantees up to 85 percent of the loan, with a quick turnaround to the lender.
There are five Short Term Loans and Revolving Lines of Credit programs under CAPLines, which provide financing for the short-term, cyclical working capital needs of small businesses.
CAPLines may be used to: finance seasonal working capital needs; finance direct costs needed to perform construction, service and supply contracts; finance direct costs associated with commercial and residential construction without a firm commitment for purchase; finance operating capital by obtaining advances against existing inventory and accounts receivable; or consolidate short-term debt.
Patriot Express Pilot Loan Initiative
The U.S. Small Business Administration has announced the SBA’s Patriot Express Pilot Loan Initiative for veterans and members of the military community wanting to establish or expand small businesses.
The U.S. Small Business Administration (SBA) Patriot Express Loan program offers veterans and members of the military community both term loans and lines of credit to help fulfill a variety of financing needs—inventory, equipment, and real estate purchases, starting a new business, or refinancing existing debt
Eligible military community members include:
• Service-disabled veterans
• Active-duty service members eligible for the military’s Transition Assistance Program
• Reservists and National Guard members
• Current spouses of any of the above
• The widowed spouse of a service member or veteran who died during service or of a service-connected disability
The SBA and its resource partners are focusing additional efforts on counseling and training to augment this loan initiative.
The new Patriot Express Loan is offered by SBA’s network of participating lenders nationwide and features our fastest turnaround time for loan approvals. Loans are available up to $500,000 and qualify for SBA’s maximum guaranty of up to 85 percent for loans of $150,000 or less and up to 75 percent for loans over $150,000 up to $500,000. For loans above $350,000, lenders are required to take all available collateral.
The Patriot Express Loan can be used for most business purposes, including start-up, expansion, equipment purchases, working capital, inventory or business-occupied real- estate purchases. Patriot Express Loans feature SBA’s lowest interest rates for business loans, generally 2.25 percent to 4.75 percent over prime depending upon the size and maturity of the loan.
Defense Loan and Technical Assistance (DELTA)
The DELTA Program provides both financial and technical assistance to help defense-dependent small firms adversely affected by defense cuts diversify into the commercial market.
Loans must be used to retain jobs of defense workers, create new jobs in impacted communities, or to modernize or expand in order to remain in the national technical and industrial base.
Loans may be made under the 7(a) and/or 504 programs. The maximum loan amount for a DELTA loan under the 7(a) program is $2 million. The maximum for a DELTA loan under the 504 Certified Development Companies debenture program is $4 million. The SBA also leverages private-sector resources to provide a full range of management and technical assistance.
The Certified and Preferred Lenders Program
The most active and expert lenders qualify for the SBA’s Certified and Preferred Lenders Program. Participants are delegated partial or full authority to approve loans, which results in faster service. Certified (CLP) lenders are those that have been heavily involved in regular SBA loan-guaranty processing and have met certain other criteria.
They receive a partial delegation of authority and are given a three-day turnaround on their applications. Preferred (PLP) lenders are chosen from among the SBA’s best lenders and enjoy full delegation of lending authority. This authority must be renewed at least every two years and the lender’s portfolio is subject to performance benchmarks and is examined periodically by the SBA.
The 504 Loan Program
The SBA’s 504 Loan Program provides long- term, fixed asset financing through certified development companies (CDC’s).
These nonprofit organizations are sponsored by private interests or by state and local governments. The SBA can guarantee debentures covering as much as 40 percent of a 504 project, up to $1.5 million for meeting job creation criteria or a community development goal.
Generally, a business must create or retain one job for every $50,000 provided by SBA. The maximum debenture increases to $2 million for businesses meeting certain public policy goals and $4 million for businesses engaged in manufacturing.
Generally, a manufacturer must create or retain one job for every $100,000 provided by the SBA. Programs from the 504 loans must be used for fixed asset projects such as purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernization or converting existing facilities; or purchasing long-term machinery and equipment.
The 504 Loan program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.
The 7(M) MicroLoan Program
The MicroLoan Program makes smaller amounts of capital (up to $35,000) available through SBA intermediaries.
Although a borrower must prove credit worthiness and the viability of the business idea, collateral and other stringent requirements will be eased.
The private non-profit intermediaries receive loans from SBA to establish a local revolving loan fund and they re-lend the money to local entrepreneurs within their designated areas.
Management and technical assistance is also available after loan closings to assist the borrower in the successful execution of the business plan.
For information, contact the intermediary lender in your area.
Regional Business Assistance Corporation
247 East Front Street
Trenton, NJ 08611
Service area: Bergen, Burlington, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Somerset, Sussex and Warren Counties
Greater Newark Business Development Consortium
744 Broad Street, 26th floor
Newark, NJ 07102
Service area: Statewide
Liberty Hall Corporate Center 1085 Morris Avenue, Suite 531
Union, NJ 07083
Service area: Statewide
Cooperative Business Assistance Corporation
328 Market Street
Camden, NJ 08102
Service Areas: Atlantic, Camden, Cape May, Cumberland, Gloucester and Salem Counties
The Small Business Investment Company (SBIC) Program
There are a variety of alternatives to bank financing for small businesses, especially business start-ups. The Small Business Investment Company (SBIC) fills the gap between the availability of venture capital and the needs of small businesses that are either starting or growing.
Licensed and regulated by the SBA, SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans.
They use their own funds plus funds obtained at favorable rates with SBA guaranties and/or by selling their preferred stock to the SBA.
SBICs are for-profit firms whose incentive is to share in the success of a small business. In addition to equity capital and long-term loans, SBICs provide debt-equity investments and management assistance.
The SBIC Program provides funding to all types of manufacturing and service industries. Some investment companies specialize in certain fields, while others seek out small businesses with new products or services because of the strong growth potential. Most, however, consider a wide variety of investment opportunities.
The Surety Bond Program
The Surety Bond Guarantee (SBG) Program was developed to provide small and minority contractors with opportunities for which they would not otherwise bid.
The Office of Surety Guarantees administers the SBG Program through a private-public partnership between the federal government and the surety industry. SBA guarantees bid, performance, payment and ancillary bonds issued by surety companies for construction, service and supply contracts, and reimburses the sureties a percentage of the losses sustained if the contractor defaults.
Contracts of up to $2 million are eligible for the SBA’s bond guarantee. SBA’s guarantee provides the incentive to issue bonds to contractors who could not otherwise compete in the contracting industry.
The SBG Program consists of the Prior Approval program and the Preferred Surety Bond (PSB) Program. The Prior Approval program guarantees up to 90 percent of a surety’s loss.
Participants must obtain SBA’s approval for each bond guarantee issued. Under the PSB program, sureties receive a 70 percent guarantee and are empowered to issue, service and monitor bonds without SBA’s prior approval.
Each of these programs targets a different segment of the contracting community and both are necessary to reach all small business clientele.
The surety bond guarantee programs are a major factor in the surety reinsurance and contracting industries and are recognized as a primary stabilizing influence by those industries.
For more information on the SBA, contact: