A tight debt market means many small businesses find themselves unable to secure financing on favorable terms through normal lending channels. Those businesses may find that a loan program available through funding from the U.S. Small Business Administration (SBA) is an option that makes sense for them.

Contrary to a popular misconception, the SBA does not provide direct loans. Instead, SBA loan programs are operated through private sector lenders that provide loans which are, in turn, guaranteed by the SBA.

7(a) Loan Guaranty Program

One of the SBA's primary loan programs, 7(a), offers loans of up to $2,000,000. The 7(a) loan program includes financial help for businesses with special requirements, such as businesses that handle exports to foreign countries, businesses that operate in rural areas, and businesses that have other specific purposes.

If you receive a loan through the 7(a) loan program, loan proceeds may be used to establish a new business or to assist in the acquisition, operation or expansion of an existing business. According to the SBA, eligible uses include:

— The purchase of land or buildings to cover new construction as well as expansion or conversion of existing facilities.
— The purchase of equipment, machinery, furniture, fixtures, supplies or materials.
— Long-term working capital, including the payment of accounts payable and/or the purchase of inventory.
— Short-term working capital needs, including seasonal financing, contract performance, construction financing and export production.
— Financing against existing inventory and receivable under special conditions.
— The refinancing of existing business indebtedness that is not already structured with reasonable terms and conditions.
— To purchase an existing business.

There are also a number of prohibited uses of proceeds under the 7(a) loan program, so it is important to work closely with an SBA-approved lender to determine if your business is a good candidate for an SBA loan under the 7(a) loan program.

For more complete information on the 7(a) loan program, visit: www.sba.gov/category/navigation-structure/loans-grants/small-business-loans/sba-loan-programs/7a-loan-program.

Certified Development Company (CDC)/504 Loan Program

The Certified Development Company (CDC)/504 loan program offers loans ranging from up to $1,500,000 to up to $4,000,000. The program provides long-term, fixed-rate financing to small businesses to acquire major fixed assets for expansion or modernization. Typically a 504 loan program project includes a loan secured from a private sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost and a contribution of at least 10 percent equity from the borrower.

Proceeds from 504 loans must be used for fixed asset projects, such as:

— The purchase of land, including existing buildings.
— The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping.
— The construction of new facilities or modernizing, renovating or converting existing facilities.
— The purchase of long-term machinery and equipment.

The 504 loan program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. Generally, the assets being financed are used as collateral for the loan and the principals must also provide personal guaranties.

For complete information on Certified Development Company/504 loans, visit: http://www.sba.gov/content/cdc504-loan-program.

Microloan Program

The SBA Microloan program offers small, short-term loans of up to $50,000 to qualified start-ups, newly established, or growing small business concerns. Loans are arranged through specially designated nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers. Each intermediary lender has its own lending and credit requirements, but most require some type of collateral as well as personal guaranties of the principal business owners.

The SBA permits microloans to be used for:

— Working capital.
— Purchase of inventory or supplies.
— Purchase of furniture or fixtures.
— Purchase of machinery or equipment.

The SBA prohibits using the proceeds of microloans to pay existing debts or to purchase real estate. For more information on the microloan program, visit: http://www.sba.gov/content/microloan-program

Even though the standards for SBA-qualifying loans are more flexible than standards for other types of loans, lenders will still require extensive documentation to evaluate each loan request. If you are thinking about applying for an SBA loan program, make sure your initial loan submission is well prepared and thorough. This will greatly increase your chances of getting through the pipeline and getting approved.

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(Photo: REUTERS/Andrew Burton)