The Small Business Administration (SBA) is a
United States government agency signed into law by President
Eisenhower in 1953 that provides support to small businesses. The
mission of the Small Business Administration is “to maintain and
strengthen the nation’s economy by enabling the establishment and
viability of small businesses and by assisting the economic recovery
of communities after disasters.”
SBA loans are made through
banks, credit unions and other lenders who partner with the SBA. The
SBA provides a government-backed guarantee on 90 percent of each loan
made in order to strengthen access to capital for small businesses.
The SBA does not provide grants or direct loans with the exception
of Disaster Relief Loans.
SBA 504 Loans
The U.S. Small Business Administration 540 Loan
or Certified Development Company program is designed to provide
financing for the purchase of fixed assets, consisting of land,
buildings, and machinery, at below market rates. As part of its
mission to promote the development of businesses, the SBA offers a
number of different loan programs tailored to specific capital needs
of growing businesses. The 504 program works by distributing the loan
among three parties. The business owner invests a minimum of 10%, a
conventional lender loans up to 50%, and a Certified Development
Company (CDC) loans the remaining 40%. Certified Development Companies
are established under the 504 code as non-profit corporations set up
to support economic growth in their local areas. There are hundreds of
CDCs nationwide. The maximum amount of the loan is currently $5
Eligibility for SBA 504 Loans
In order to qualify for the program, the
borrower must meet the SBA’s definition of a small business and must
plan to use over half (51%) of the property for its own operations
within one year of ownership; if the building is to be newly
constructed, the borrower must use 60% at once and plan to occupy 80%.
The borrower may form a real-estate entity that leases 100% to the
operating business, which then subleases the surplus space (up to
49%). To qualify for this program, U.S. citizens or permanent
residents must hold a majority of the ownership of the operating
company and holding entity.
Disaster Assistance Loans
Homeowners and renters are eligible for
long-term, low-interest loans to rebuild or repair damaged properties
to pre-disaster conditions. Before making a loan, the SBA must
establish the cost of repairing or rebuilding the structure
(determined by SBA’s Field Inspectors who visit the property), the
applicant’s repayment ability (determined by the applicant’s
creditworthiness and income) and whether the applicant can secure
credit in the commercial market (called the credit elsewhere test).
Applicants who do not qualify for disaster assistance loans are
referred to the Federal Emergency Management Agency (FEMA) for grants.
Although the SBA will not decline a loan for lack of collateral, the
agency is statutorily required to collateralize whatever assets are
available including the damaged property, a second home or other real
property. Businesses are also eligible for long-term, low-interest
rate loans to recover from declared disasters.