Order Code RL33243
CRS Report for Congress
Received through the CRS Web
Small Business Administration: A Primer on
Programs
January 20, 2006
N. Eric Weiss
Analyst in Financial Institutions
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Small Business Administration: A Primer on Programs
Summary
The Small Business Administration (SBA) was created to aid small businesses
because they are viewed as important sources of job creation and economic growth,
but are typically disadvantaged in competing against large firms. Many minority-
owned small businesses are even more disadvantaged, and they can apply to join
programs that provide limited competition contracts and technical assistance to help
them to grow and gain experience to compete successfully against larger businesses.
The SBA has many programs that affect every state and congressional district.
The disaster loan programs are the subject of frequent congressional and media
attention because of complaints about slow processing of loan applications. The
SBA does not view these programs as immediate assistance, but the public frequently
is looking for a rapid response.
Most Members of Congress receive many constituent inquiries about SBA
loans, the loan guarantee programs, and special contracting programs. Except for
disaster loans, the SBA does not directly make loans to businesses. Instead it
provides guarantees for private business loans that lenders would not otherwise be
willing to make under desirable terms such as maturity and interest rate. The SBA
also provides funding to selected financial intermediaries that invest in and otherwise
support small businesses.
The SBA reviews loan and guarantee applications to assure that there is a
reasonable probability that a loan will be repaid. In the event of default on a loan, the
SBA uses all available avenues to obtain repayment, including seizing income tax
refunds.
This report summarizes the major SBA programs. It will be updated if new
programs are added or existing programs phased out.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SBA Disaster Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Types of Disaster Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Disaster Loans to Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Disaster Loans to Businesses and Nonprofits . . . . . . . . . . . . . . . . . . . . 4
SBA Small Business Financial Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
What Is a Business? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
What is Small? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SBA Lender Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certified Lenders Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Preferred Lenders Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SBA Express . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SBA Special Contracting Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Small Disadvantaged Businesses (SDBs) . . . . . . . . . . . . . . . . . . . . . . 13
Historically Underutilized Business Zones (HUBZones) . . . . . . . . . . 14
Service-Disabled Veterans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Office of Small and Disadvantaged Business Utilization (OSDBU) . . 14
Capital Access Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Small Business Innovation Research Awards (SBIR) . . . . . . . . . . . . . 15
Small Business Technology Transfer (STTR) Awards . . . . . . . . . . . . 15
Small Business Investment Companies (SBICs) . . . . . . . . . . . . . . . . . 15
New Market Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Small Business Development Centers (SBDC) . . . . . . . . . . . . . . . . . . 15
Entrepreneurial Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Service Corps of Retired Executives (SCORE) . . . . . . . . . . . . . . . . . . 16
Small Business Development Centers (SBDCs) . . . . . . . . . . . . . . . . . 16
Women’s Business Centers (WBCs) . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Native American Outreach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Advocacy and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Advocacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
National Women’s Business Council (NWBC) . . . . . . . . . . . . . . . . . . 16
Veterans Business Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Recent Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Discontinued Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Extended Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Revisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Size Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Figures
Figure 1. Major SBA Program Areas, FY2005 ($ Millions) . . . . . . . . . . . . . . . . 3
List of Tables
Table 1. Maximum Interest Rates on SBA 7(a) Guaranteed Fixed-Rate Loans . . 8
Table 2. 504 Loan Maximum Debenture and Loan Amounts . . . . . . . . . . . . . . 10
Table 3. SBA Loan Guarantee Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Small Business Administration: A Primer on
Programs
Introduction
The Small Business Administration (SBA) not only represents the interests of
small businesses, but it also provides disaster recovery loans for hurricanes, floods,
and even terrorist attacks to individuals and businesses. After Hurricanes Katrina
and Rita in 2005, many criticized the SBA’s disaster loan program for not processing
loan applications rapidly1 and for allowing large businesses to win government
contracts meant for small businesses.2 This report provides an overview of the
SBA’s programs. The SBA’s programs have detailed rules on program requirements
and administration that are not covered in this report. Detailed information is
available on the SBA’s website3 and in Title 13 of the Code of Federal Regulations.4
The Small Business Act states that continued free competition is “the essence
of the American economic system.”5 It declares that it is the policy of Congress to
insure that a fair proportion of government contracts are awarded to small businesses
and to support small businesses with financing, export support, and other means.
Moreover, the act charges the SBA with representing small business interests with
other government agencies.
The SBA also has programs for disadvantaged groups to overcome
disadvantages that members of racial and ethnic minorities face in business. These
programs give participants training and reduced competition for government
contracts. After graduating from the programs, the SBA expects that the firms should
be able to compete more successfully for government and private sector work.
SBA’s origins can be traced to the Great Depression of the 1930s and World
War II when concerns about unemployment and war production were paramount.
The SBA replaced the Reconstruction Finance Corporation (RFC), which was created
by the federal government in 1932 to provide funding for businesses of all sizes
during the Depression and later financed war production. The RFC shrank during the
early 1950s after the end of World War II and was disbanded amidst charges of
1 “Slow Business Administration,” The Washington Post, Dec. 9, 2005, p. A-30.
2 Griff Witte and Renae Merle, “Defining Small,” The Washington Post, Oct. 20, 2005, p.
D-1.
3 See [http://www.sba.gov].
4 See [http://www.access.gpo.gov/cgi-bin/cfrassemble.cgi?title=200513].
5 P.L 85-536, as amended.
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political favoritism in granting loans. In 1953 Congress passed the Small Business
Act (P.L. 83-163) that created the SBA. The SBA has undergone many changes
since 1953. One key change is that it no longer makes direct loans to businesses or
individuals except for disaster loans.
As a general principle and following its statutory mandate, the SBA is willing
to take more risks than other lenders will, but there is a limit to the amount of risk it
is willing to accept. To reduce risk, it seeks collateral and examines the borrower’s
ability to repay a loan. For example, loans and loan guarantees of more than $10,000
usually require collateral. For some loans and loan guarantees, personal guarantees
are required if the collateral is considered insufficient by the lender or the SBA. In
short, these are loans that must be repaid, not grants that are not repaid.
Appropriations cover salaries, expenses, and losses (after debt recovery) in the
SBA’s lending and guarantee programs. One trend during the administration of
President George W. Bush has been increasing the fees for loan guarantees to reduce
the amount appropriated. This reduces the cost of the program to the federal
government by shifting costs to program participants. In FY2005, the SBA budget
was $948.4 million.
The SBA has six types of programs: disaster loans, business loan guarantees,
special federal government procurements limited to businesses owned by socially and
economically disadvantaged groups, capital access programs, entrepreneurial
development, and a residual category including research and advocacy. Figure 1
shows SBA’s FY2005 budget of $948.4 million broken down into these areas.
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Figure 1. Major SBA Program Areas, FY2005
($ Millions)
Capital Access
Programs
$27.4
Advocacy and
Other
Business Loan
$14.9
Guarantees
$151.3
Special
Procurements
$79.0
Disaster
Entrepreneurial
Assistance
Development
$523.1
$152.6
Source: Small Business Administration, Congressional Submission Fiscal Year 2006.
SBA Disaster Loans
Overview
SBA disaster loans are some of the agency’s best-known programs and the only
ones that are not limited to small businesses. The disaster loan programs are the
subject of frequent congressional and media attention because of complaints about
slow processing of loan applications. The SBA does not view these programs as
immediate assistance, but the public frequently is looking for a rapid response.
Disaster loans are available to both individuals and small businesses in declared
disaster areas. These are the only instances where the SBA makes loans to the
ultimate borrower instead of guaranteeing loans that others make or supporting
nonprofit lenders with loans. There are no prepayment penalties on any disaster
loans.6
6 13 C.F.R. 123.105 and 123.203.
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Types of Disaster Loans
Disaster Loans to Individuals. Individuals can obtain loans for both
personal property such as cars and furniture, and to repair homes destroyed. Loans
are limited to uninsured losses.
Personal Property Disaster Loans. Personal property loans are limited
to $40,000 and must be used to repair or replace damaged items. The loan can cover
possessions such as cars, clothes, and furniture. Both homeowners and renters may
apply. Unusually high-value possessions such as furs, boats, airplanes, antiques, and
recreational vehicles are not covered.
Applicants who can obtain credit elsewhere are charged a rate based on the cost
of money to the U.S. government, but not more than 8% annually. Those who cannot
obtain credit elsewhere are charged half that rate, but not more than 4% annually.
The maximum maturity for these loans is 30 years, but the SBA determines
repayment terms on a case-by-case basis according to the person’s ability to repay.
Real Property Disaster Loans. Real property disaster loans are not
available to renters, have a limit of $200,000, and must be used to repair or restore
primary homes. The loan cannot be used to improve the home beyond its original
condition unless local building codes require structural changes.7
Disaster Loans to Businesses and Nonprofits. There are four types of
loans available to businesses located in counties covered by a presidential disaster
declaration. In certain circumstances, the SBA will also make these loans available
when a governor, the Secretary of Agriculture, or the Secretary of Commerce makes
a disaster declaration. Physical disaster loans are available to almost any nonprofit
or business. The other business disaster loans are limited to small businesses.
Physical Disaster Loan. Any business or nonprofit regardless of size can
apply for a physical disaster business loan of up to $1.5 million for repairs and
replacements to real property, machinery, equipment, fixtures, inventory, and
leasehold improvements that are not covered by insurance. The SBA may waive the
$1.5 million ceiling if a business is a “major source of employment.”8 Loans are for
up to 30 years, and the interest rates are determined under the same rules as for
personal property disaster loans.
Nonprofits that are rejected or approved for less than the requested amount by
the SBA for a physical disaster loan are in some circumstances eligible for grants
from the Federal Emergency Management Agency (FEMA). One reason that a
nonprofit might be approved for less than the full amount by the SBA is a request for
more than $1.5 million. The SBA could approve the $1.5 million and reject the
excess. The borrower could then approach FEMA for the amount denied.
7 13 U.S.C. 123. See [http://www.sba.gov/disaster_recov/loaninfo/property.html].
8 13 C.F.R. 123.202.
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Economic Injury Disaster Loans. Economic Injury Disaster Loans (EIDL)
are limited to small businesses. If the Secretary of Agriculture designates an
agriculture production disaster, small farms and small cooperatives are eligible.
EIDLs are available in the counties included in a presidential disaster declaration and
contiguous counties. The loans are designed to provide small businesses with
operating funds until the business recovers. The maximum loan is $1.5 million and
the terms are the same as personal and physical disaster business loans.
Military Reservist Economic Injury Disaster Loans. This program
makes loans to small businesses to cover ordinary and necessary operating expenses
that could not be met because an essential employee who is in the military reserves
was called up to active duty in a period of military conflict resulting from a
declaration by the President, Congress, or the Secretary of Defense.
These loans are at a subsidized rate and are not available if the business has
resources to cover these expenses. The statutory limit is $1.5 million, but the SBA
will not approve more than the actual, covered operating expenses. The SBA will
consider waiving the $1.5 million limit for small businesses that are “a major source
of employment.” The maximum interest rate is 4%.
GO Loans. In response to Hurricanes Katrina and Rita, the SBA created the
Gulf Opportunity Pilot Loan Program (GO Loans) for small business in or relocating
to the counties and parishes declared major disaster areas. The maximum loan of
$150,000 is backed by an 85% SBA guarantee. The goal is to process the loan
application in one day. The maximum interest rate on loans of $50,000 or less is
prime plus 6.5%. On larger loans the maximum interest rate is prime plus 4.5%.
Only SBA Express lenders (described below) can make these loans.
SBA Small Business Financial Programs
Overview
The SBA has four types of programs to directly support small businesses that
are not affected by disasters. The first are loan guarantees in which the SBA
guarantees loans to small businesses that the private sector would otherwise be
unwilling to make because of the risk.
The second are contracting programs for small businesses that can involve sole
source, limited competition, and cost advantages in government contract
competitions. Sometimes the use of small business subcontractors is an evaluation
factor for the prime contractor. When a government agency is planning a
procurement, it chooses between one of these vehicles, and full and open competition
in which there are no special advantages for small businesses.
The third are “capital access” programs that indirectly provide equity funding
for small businesses and improve access to capital markets through SBA guarantees.
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The fourth are entrepreneurial development programs to provide training to
small business owners mostly using volunteers and nonprofits.
To qualify for any of the SBA programs, an organization must be both a
business and small.
What Is a Business? To participate in either type of program, a business
must meet the SBA’s definition of “small business.” This is a business that
! is organized for profit,
! has a place of business in the United States,
! makes a contribution to the U.S. economy by paying taxes or using
American labor, products, and materials, and
! does not exceed the size standard for its industry.9
What is Small? The definition of “small” — called the size standard —
depends on what a business produces. Also depending on what is produced, the SBA
determines the size standard either in terms of dollars of revenue or number of
employees (but not both).10 For example, most manufacturers must have no more
than 500 employees to meet the size standard. Most general and heavy construction
firms (except dredging) must have an average annual revenue of $28.5 million or less
($31 million on and after January 4, 2006). The formal determination involves
selecting the North American industrial classification system (NAICS) codes that
represent the business.11 Many NAICS codes are very similar, and there is as much
art as objectivity in selecting which codes to use in the SBA programs. Some
programs use a single size standard, such as 500 employees, regardless of industry.
When bidding on contracts that are limited to small businesses or that give
preferences to them, businesses must certify that they meet the size standard when
they submit their proposals. Depending on the type of contract, they may be required
to certify their size at other times. A large company can purchase a small business
that has won a small-business-set-aside contract and continue to perform work under
the contract. Depending on the contract vehicle, a small business subsidiary could
win new small business work for the large parent.
Loan Guarantees
Overview. The SBA provides loan guarantees for small businesses that cannot
obtain commercial loans. The SBA requires personal guarantees from owners and
shares the risk of default with the lender by making the guarantee less than 100%.
The borrower still owes the amount contracted less the value of any collateral
liquidated. The SBA can attempt to recover the unpaid debt through administrative
offset, salary offset, or IRS tax refund offset. Most types of business are eligible for
9 See [http://www.sba.gov/size/summary-whatis.html].
10 13 C.F.R. 121 establishes how the size standards are developed.
11 In 1997 NAICS replaced the Standard Industrial Classification (SIC) codes. Some
documents still refer to “SIC” instead of “NAICS.”
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loan guarantees, but a few are not. These excluded business lines include real estate
investment firms, financial speculation and intermediaries, pyramid sales, illegal
activities, and gambling. Nonprofit and charitable organizations are also ineligible.
Prepayment. The SBA charges a prepayment penalty on loans applied for on
or after December 22, 2000. This is a “subsidy recoupment fee” and applies only to
loans of 15 or more years when the borrower makes the repayment in the first three
years after the first loan disbursement, and when the repayment is more than 25% of
the loan amount. The fee is 5% of the prepayment in the first year, 3% in the second,
and 1% in the third year.12
Fees. To offset the cost of these programs to the taxpayer, the SBA charges
fees based on the size of the loan. There is a one time guarantee fee that currently
ranges from 2% to 3.625%. The lender is charged an annual service fee of 0.5%.
Maturity. SBA guaranteed loans generally have longer terms to maturity than
other business loans. The maximum loan is 25 years for real estate. For fixed capital
equipment, the maximum term is the lesser of 25 years or the life of equipment
financed. For working capital it is seven years. There are some exceptions. For
example, if a borrower is likely to be unable to repay a working capital loan in seven
years, the SBA can allow a longer term, such as 10 years, if that makes the loan
viable.
Use of Proceeds. The SBA will guarantee loans for most business purposes.
Exceptions to this are refinancing existing debt where the lender is in a position to
absorb a loss, and the SBA would be responsible for the loss because of the
refinancing; financing a partial change in ownership; paying funds owed to the
owner; paying delinquent taxes that should have been escrowed; and non-business
purposes. The SBA will make loans to farms, but it recommends contacting the
Farm Service Agency first.
Other Sources. The SBA does not guarantee loans to businesses that can
obtain loans without it. If the entire amount is not available without an SBA
guarantee, the SBA will guarantee the difference.
Programs. The SBA has many loan guarantee programs.
7(a). The main SBA guarantee program is the 7(a) loan guarantee, which is
named after the section of the Small Business Act that authorizes it. These are loans
made by SBA partners (mostly banks, but also some other financial institutions) and
partially guaranteed by the SBA. Despite the offer from the SBA to guarantee a loan,
a lender does not have to make it. The SBA has created variations on the 7(a)
program for special purposes. It has also created expedited processing with selected
lending partners called certified lenders and preferred lenders.
The maximum amount of a loan depends on the SBA’s guarantee. The SBA is
limited to guaranteeing $1.5 million, but no more than 85% on loans up to $150,000
12 13 C.F.R. 120.223.
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and 75% on loans more than $150,000. This makes the maximum loan amount $2
million.
Interest rates on 7(a) loans are negotiated between the borrower and the lender,
but are subject to SBA maximums. Table 1 summarizes these caps.
Table 1. Maximum Interest Rates on SBA 7(a) Guaranteed
Fixed-Rate Loans
Amount
Maturity
Maximum Interest Rate
$50,000 or more
Less Than 7 Years
Prime + 2.25%
$50,000 or more
7 Years or More
Prime + 2.75%
$25,000 to $50,000
Less Than 7 Years
Prime + 3.25%
$25,000 to $50,000
7 Years or More
Prime + 3.75%
$25,000 or less
Less Than 7 Years
Prime + 4.25%
$25,000 or less
7 Years or More
Prime + 4.75%
Variable-rate loans can be pegged to either the prime rate or the SBA optional
peg rate, which is a weighted average of rates that the federal government pays for
loans with maturities similar to the guaranteed loan. The SBA optional peg rate is
calculated and published quarterly in The Federal Register. For October to
December 2005 the peg rate was 4.5%.13 The spread over the prime rate or SBA
optional peg rate is negotiable between the borrower and the lender. The adjustment
period can be no more than monthly and cannot change over the life of the loan.
In recent years the Administration has proposed making the 7(a) program self-
funding by raising the fees charged users for the SBA’s loan guarantees. In FY2005,
the program became entirely funded by user fees, although the conference committee
report agreed to revisit the decision in the event of an economic downturn.14
Variations on the 7(a) Program. There are two variations on the 7(a)
program: prequalification and Certified Development Company (CDC)/504 loans.
The prequalification program targets low-income borrowers, disabled business
owners, new and emerging businesses, veterans, exporters, and rural and specialized
industries. The maximum loan amount is $250,000. Other terms follow standard
7(a) parameters. SBA encourages applicants to use intermediaries to prepare a viable
loan application package. The intermediaries insure that the business plan and
13 U.S. Small Business Administration, “Interest Rates; Quarterly Determinations,” 70
Federal Register 58249, Oct. 5, 2005.
14 U.S. Congress, House of Representatives, Making Appropriations for Foreign Operations,
Export Financing, and Related Programs for The Fiscal Year Ending September 30, 2004,
and for Other Purposes, conference report to accompany H.R. 4818, 108th Cong., 2nd sess.,
Report 108-792, p. 843.
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supporting documents are complete; they also make sure that the applicant has credit
merit. Once the application is completed, the intermediary sends it to the SBA for
expedited processing. If the SBA approves the application, the intermediary will help
the business to find a lender offering the most competitive rates.
Small Business Development Centers (SBDCs) do not charge for this service,
but for-profit intermediaries do.
The 504 loan program uses CDCs, which are nonprofit organizations that
support local economic development. Each CDC has its own geographic territory.
The program provides long-term, fixed-rate loans for major fixed assets such as land,
structures, machinery, and equipment. Program loans cannot be used for working
capital, inventory, repaying debt, or refinancing. A commercial lender provides up
to 50% of the financing package, which is secured by a senior lien. The CDC’s loan
of up to 40% is secured by a junior lien. The SBA backs the CDC with a guaranteed
debenture.15 The small business must contribute at least 10% as equity.
The maximum amount of the SBA’s debenture depends on its purpose. This is
summarized in Table 2 below.
15 A debenture is a bond that it not secured by a lien on specific collateral.
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Table 2. 504 Loan Maximum Debenture and Loan Amounts
Maximum
Maximum
Loan
Goal
Debenture
Amount
Job Creation or Community Development
$1.5 million
$3.38 million
A business must create or retain one job for
each $50,000 of the debenture except for small
manufacturers.
Small Manufacturers Job Creation
$4 million
$9 million
The primary output of the company must be in
NAICS codes 31, 32, or 33. All production
facilities must be in the United States. In
addition, the loan must result in the creation or
retention of at least one job per $100,000
guaranteed or improve the local economy or
meet
one of the public policy goals below.
Public Policy Goal Supported by Loan
$2 million
$4.5 million
! Business district revitalization
! Expansion of exports
! Expansion of minority business
development
! Rural development
! Increasing productivity and
competitiveness
! Restructuring because of federally
mandated standards or policies
! Changes necessitated by federal
budget cutbacks
! Expansion of small business
concerns owned and controlled by
veterans, especially service-disabled
veterans
! Expansion of small business
concerns owned and controlled by
women
Note: The maximum loan amount is the total financial package including the commercial loan and
the CDC loan. It does not include the owner’s minimum 10% equity contribution. It assumes that the
CDC loan is 40% of the total package.
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Special Purpose Loan Guarantees. In addition to the 7(a)-based loan
guarantee programs, the SBA has special purpose loan guarantee programs for
exports, adjusting to the North American Free Trade Agreement (NAFTA),
Employee Stock Ownership Program trusts, pollution controls, and working capital.
Export Working Capital Loans. Export Working Capital Loans are a joint
program between the SBA and the Export-Import Bank. The SBA will guarantee up
to the lesser of $1.5 million or 90% of the loan.
Export Express. The SBA’s Export Express program guarantees loans for
exporters to finance business development activities such as participating in foreign
trade shows, translating brochures, and improving facilities. The SBA will guarantee
85% of loans up to $150,000 and 75% of loans from $150,000 to $250,000 (the
maximum loan amount under the program). This program is scheduled to end in
2006.
International Trade Loans. International Trade Loans are available to small
businesses that are exporting goods and services, those that are planning to become
exporters, and those adversely affected by imports. Loan and guarantee maximums
are the same as the regular 7(a) loan guarantee program, but the maximum
guaranteed amount can be increased to $1.75 million instead of the normal $1.5
million under special circumstances.
Community Adjustment and Investment Program (CAIP). The Community
Adjustment and Investment Program (CAIP) uses federal funds to pay the fees on
7(a) and 504 loans to businesses located in communities that have been adversely
affected by the North American Free Trade Agreement (NAFTA).
Employee Trusts. The SBA will guarantee loans to Employee Stock
Ownership Plans (ESOPs) that are used either to lend money to the employer or to
purchase control from the owner. ESOPs must meet regulations established by the
IRS, Department of the Treasury, and Department of Labor. These are 7(a) loans.
Pollution Control. The SBA has a special 7(a) program for small businesses to
purchase pollution control equipment.
CAPLines. CAPLines are five special 7(a) programs designed to meet the
requirements of small businesses for short-term or cyclical working capital. The
maximum term is five years.
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Table 3. SBA Loan Guarantee Summary
Maximum
Maximum
SBA
Program
Purpose
Loan
Guarantee
7(a)
This is the SBA’s primary business
$2.0 million
85% of loans
loan program. Small businesses
of $150,000
apply for an SBA loan guarantee
or less, 75%
after being denied a loan by a
of loans more
commercial lender that will then
than $150,000
make the loan. Can be for up to 10
years for working capital and 25
years for real assets.
GO Loans
SBA-guaranteed loans to businesses
$150,000
85%
in counties and parishes covered by
Hurricanes Katrina and Rita
disaster declarations. These loans
are made only by SBA Express
lenders (see page 14).
Prequalification
Prequalification intermediaries help
$250,000
Same as 7(a)
small businesses assemble 7(a) loan
program
guarantee requests.
Certified
Loans are for real estate,
$1.5 million
The
Development
machinery, or equipment. The
debenture,
debenture,
Company
usual loan package includes a loan
depending
which can be
(CDC)/504
from a private lender for up to 50%
on job
up to 40% of
Loan Program
of the project cost secured by a
creation
the loan
senior lien, a loan for up to 40% of
criteria or
package, is
the project cost secured with a
community
100%
junior lien from the CDC (backed
economic
guaranteed.
by a 100% SBA-guaranteed
develop-
debenture) and at least 10% equity
ment. Up to
from the small business.
$4.0 million
if it meets
other
criteria.
SBA Lender Programs
The SBA has programs for experienced 7(a) lenders that provide faster
processing to borrowers. This speed is achieved because the SBA lets the lender do
more of the work with less SBA review. They allow the SBA to guarantee more
loans with fewer employees.
Certified Lenders Program. In the certified lenders program (CLP), the
SBA’s goal is to reach a decision on the guarantee within three business days. A
certified lender can review an application for an SBA-guaranteed loan and process
much, but not all, of the paperwork. The SBA does a credit and eligibility review
instead of a complete verification of the data to achieve this faster turnaround.
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Preferred Lenders Program. In the preferred lenders program (PLP), the
SBA delegates loan approval, closing, and most servicing and liquidation authority
and responsibility to these selected lenders. The SBA continues to check loan
eligibility. Since the SBA does not review individual loan applications, borrowers
can receive funding in a matter of days.
SBA Express. The SBA Express program offers borrowers an answer within
36 hours. Lenders are authorized by the SBA to make eligibility decisions. The
maximum loan amount is $350,000, but the SBA will guarantee only 50% compared
to 85% on loans of less than $150,000, or 75% on larger loans in other 7(a)
programs. The maximum interest rate that a lender can charge is 6.5% over the
prime rate for loans of $50,000 or less and 4.5% over prime for other loans. Only
SBA Express lenders can make GO Loans, which were discussed previously.
SBA lenders wishing to join the SBA Express program must meet portfolio
performance requirements and be preferred lenders. Other lenders in certain areas
desiring to join the program must originate a reasonable number of commercial loans
of $50,000 or less.
SBA Special Contracting Programs
There are three major SBA special contracting programs that allow small
businesses owned by disadvantaged individuals or located in impoverished areas to
compete for government contracts only with similar firms. This gives these
disadvantaged businesses a chance to win government contracts without having to
compete against larger and more experienced companies.
8(a). The 8(a) program (named for the section of the Small Business Act from
which it derives its authority) is for businesses owned by citizens who are socially
and economically disadvantaged.16 A firm that is certified as an 8(a) is eligible for
sole source and limited competition government contracts. They also can be given
a 10% cost advantage in some procurements. The SBA provides technical assistance
and training to 8(a) firms. Firms graduate from the program after nine years.17 As
of November 15, 2005, there were 9,609 firms in the 8(a) program.18
Small Disadvantaged Businesses (SDBs). SDBs are similar to 8(a)
firms, but the benefits are limited to federal procurements. Firms can be in this
program for three years. Firms that are certified as 8(a) are SDBs for the duration of
16 Section 8(a) of the Small Business Act, P.L. 85-536, as amended, can be found at 15
U.S.C 637(a). Regulations are in 13 C.F.R. 124.
17 See [http://www.sba.gov/8abd/indexfaqs.html].
18 Small Business Administration, special tabulation.
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their 8(a) status. The program offers price evaluation adjustments and can be a factor
in contract evaluations.19 As of November 15, 2005, there were 13,021 SDBs.20
Historically Underutilized Business Zones (HUBZones). This program
provides assistance to small businesses located in Historically Underutilized Business
Zones (HUBZones) through limited competition contract competitions, sole source
awards, or price evaluation preferences in full and open competitions.21 The
determination of whether or not an area is a HUBZone is based on criteria specified
in 13 C.F.R. 126.103. To be certified as a HUBZone small business, at least 35% of
the small business’s employees must reside in the HUBZone.
Service-Disabled Veterans. Contracting officers of government agencies
are authorized to limit procurement competitions or sole source contracts to small
businesses owned by service-disabled veterans.22
Office of Small and Disadvantaged Business Utilization (OSDBU).
Every government agency with procurement authority has an Office of Small and
Disadvantaged Business Utilization (OSDBU) to advocate within the agency for
firms that are small, SDB, 8(a), woman-owned, HUBZone, or service-disabled
veteran owned. Agencies set goals for contracting with these firms as prime and
subcontractors, and the OSDBUs participate in the process. In addition, the OSDBUs
help their agencies reach these goals. This is done with contracts that either limit
competition to these groups, give a cost advantage to these groups, or set a
subcontracting goal for these groups.
Capital Access Programs
Overview. The SBA has other programs to improve the access of small
businesses to specific parts of capital markets. The most important of these are to
guarantee performance (surety) bonds, provide special high technology contracting
opportunities (small-business innovative research and small-business technology
transfer programs), support equity investments (small-business investment
companies), and provide technical assistance (small-business development centers).
Surety Bonds. A surety bond is a bond that a contractor purchases to
guarantee that it will complete a contract. If the contractor fails to complete the
contracted work, the surety bond is used to pay for completion. The SBA guarantees
four types of surety bonds. First, it guarantees bid bonds to ensure that if a bidder
wins a procurement competition the bidder will sign the contract. Second, it
guarantees payment bonds that the contractor will pay suppliers and subcontractors.
Third, it guarantees performance bonds that the contractor will complete the work as
19 See [http://www.sba.gov/sdb/indexaboutsdb.html].
20 Small Business Administration, special tabulation.
21 See [https://eweb1.sba.gov/hubzone/internet/].
22 P.L. 108-183.
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contracted. Fourth, it guarantees ancillary bonds that are required to guarantee the
performance of the contract.
Small Business Innovation Research Awards (SBIR). SBIR awards
are competitive grants to small businesses (500 or fewer employees) to research and
develop new ideas for selected government agencies. Government agencies with the
largest research budgets fund the SBIR program. The SBA coordinates and oversees
the SBIR program but does not provide funding for the awards. Phase I grants allow
a company to determine if an idea has scientific and technical merit and is feasible.
Phase II evaluates the idea’s commercial potential. Phase III is private sector
development of the idea. Phase I awards are for a maximum of $100,000 over six
months, and phase II awards are for a maximum of $750,000 over more than two
years. Intellectual property rights are protected for four years after the completion
of phase I, phase II, or phase III. For more details on SBIR awards, see CRS Report
96-402, Small Business Innovation Research Program, by Wendy H. Schacht.
Small Business Technology Transfer (STTR) Awards. The STTR
program is similar to the SBIR program, but it requires the small business to work
with a nonprofit research institute. The SBA coordinates and oversees the STTR
program but does not provide funding for the awards. Phase I awards are a
maximum of $100,000 for one year. Phase II awards are for a maximum of $500,000
over two years. While there is no STTR funding for phase III, the awarding agency
may issue a sole source contract to a team that has successfully reached this stage.
Small Business Investment Companies (SBICs). Small Business
Investment Companies (SBICs) are privately owned companies that are licensed by
the SBA to provide debt and equity capital to small businesses. They can obtain
loans from the SBA to supplement their own capital. For the SBIC program, a small
business is a business with net worth of $18 million or less and an average after-tax
income for the two preceding years of $6 million or less. There are alternative size
standards in some industries. The SBIC sells a debenture to the SBA, which
guarantees repayment and creates a pool of these debentures for resale on the
secondary market. SBICs can borrow three times their private capital to a maximum
of $113 million.
New Market Venture Capital. New Market Venture Capital is a program
that encourages equity investments in small businesses in low-income areas that meet
specific statistical criteria established by regulation. A tax credit is available on a
competitive basis.
Small Business Development Centers (SBDC). Small Business
Development Centers (SBDCs) provide management assistance to small businesses.
The SBA provides up to 50% of an SBDC’s funding with other sponsors providing
the balance.
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Entrepreneurial Development
Entrepreneurial development provides technical and managerial training to
small businesses. Some of this is free and other training is at low cost.
Service Corps of Retired Executives (SCORE). The Service Corps of
Retired Executives (SCORE) uses over 11,000 volunteers to bring practical
experience to start-up small business and to those thinking about starting a new small
business.
Small Business Development Centers (SBDCs). SBDCs provide free
or low-cost assistance to small businesses using programs customized to local
conditions. SBDCs support small business in marketing and business strategy,
finance, technology transfer, government contracting, management, manufacturing,
engineering, sales, accounting, exporting, and other topics. SBDCs are funded by
grants from the SBA and matching funds. There are more than 1,100 SBDCs with
at least one in every state and territory.
Women’s Business Centers (WBCs). WBCs are similar to SBDCs,
except they concentrate on assisting women entrepreneurs. There are WBCs in most
states and territories.
Native American Outreach. The SBA’s Office of Native American Affairs
works to encourage native Americans (native American Indians, native Alaskans, and
native Hawaiians) to start and expand small businesses.
Advocacy and Other
Advocacy. The Office of Advocacy represents small businesses, small
organizations, and small governments within the federal government. Among its
activities are sponsoring and encouraging research into the role of small businesses
in the national economy and encouraging federal agencies to specifically consider the
impact of regulations on small businesses.
National Women’s Business Council (NWBC). The NWBC is an
independent office within the SBA charged with undertaking programs to support
women-owned businesses.
Veterans Business Development. The Office of Veterans Business
Development encourages veterans who are interested in starting a small business or
who own one.
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Recent Changes
Discontinued Programs
Over the years, the SBA has terminated many programs. Some of these
cancellations were done administratively, others at the direction of Congress. In
many cases key features of the programs were incorporated in other programs. In
recent years the small loans program, FA$TRAK loan program (now called SBA
Express, which continues), LowDoc loan program, handicapped assistance loan
program, and disabled assistance loan program. The SBA has ended its support of
the veterans franchise program (VETFRAN), but the Department of Veterans Affairs
continues its support.
Many features of the FA$TRAK and LowDoc programs were brought into the
SBAExpress program, which is part of the 7(a) loan guarantee program. Those
opposed to these changes believed that FA$TRAK and LowDoc offered borrowers
and lenders advantages in the areas of collateral, fees, and lender participation
requirements that SBAExpress does not.
Proponents of eliminating the handicapped, disabled, and VETFTRAN
programs believed that these business owners did not face challenges that differed
significantly from other small business owners.
Extended Programs
Community Express and Export Express. These programs were to
expire on November 30, 2005, but the SBA extended them until May 31, 2006.
Community Express is modeled on the SBA Express program, but targeted at
underserved areas and offering 75%-85% guarantees compared to SBA Express’s
50%. Export Express is also modeled on SBA Express and offers higher guarantee
percentages.
Revisions
Size Standards. The SBA increased the size standard defining “small”
business when measured by monetary standards such as revenue, income, and assets
by 8.7% effective January 4, 2006. This is the first increase in the standard since
February 2002.23 The SBIC size standard is set by law and is not changed.
23 U.S. Small Business Administration, “Small Business Size Standards Inflation Adjustment
to Size Standards; Business Loan Program; Disaster Assistance Loan Program,” 70 Federal
Register 72577, Dec. 5, 2005.