Archives

SBA Loans

SBA Loans

Definition

The US Small Business Administration (SBA) is an important resource for small businesses. SBA provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing. In this post we will talk about the different financial assistance programs that the SBA offers. If your startup needs a business plan, our Level 2 Business Plans are written specifically to meet the SBA’s requirements for funding.

1. 7(a) Loan Program: The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. The 7a loans were created to help businesses with special requirements. The programs encompass express loans, loans for exporters, loans for small and rural communities, seasonal funding loans, and loans for borrowing cost fees.

For the 7a loans, SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7(a) loans are the most basic and most commonly used type of loans and they are also the most flexible, since financing can be guaranteed for a variety of general business purposes. Most American banks participate in the program, as do some non-bank lenders, which expands the availability of loans. Participating lenders agree to structure loans according to SBA’s requirements, and apply and receive a guaranty from SBA on a portion of this loan.

2. CDC/504 Loan Program: The CDC/504 loan program is a long-term financing tool for economic development within a community. The 504 Program provides small businesses requiring “brick and mortar” financing with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. For the 504 loans, 50% of funding is contributed by the bank or private sector lender, 40% is provided by a CDC, and the business owner a 10% equity share.

A Certified Development Company (CDC) is a private, nonprofit corporation set up to contribute to the economic development of its community. CDCs work with SBA and private sector lenders to provide financing to small businesses.

3. Microloan Program: The Microloan Program from the SBA provides short-term funding to businesses by making funds available to non-profit community-based lenders who then make loans to eligible borrowers. The maximum loan amount is $50,000 with the average loan around $13,000.

4. Disaster Loans: Disaster loans are available to businesses and individuals to repair damage to physical property (including real estate, personal property, equipment, inventory and business assets) damaged or destroyed by a declared disaster. Loans are also available to assist business, located in a declared disaster area, who incurred economic injury, regardless of physical damage. SBA Disaster loans also cover personal home and property, and funds for businesses unable to meet operating expenses because an essential member was called-up for duty.

Trust

Trust

A trust is a legal construct in which one person (the trustee) holds legal title to property previously owned (by the settlor) for the benefit of another (the beneficiary).

A non-profit can exist as a trust, when the trustee is under the obligation to use or hold the property for a charitable purpose.

A non-profit can also be named as the beneficiary to a trust, when the settlor makes a Planned Gift.

SBA Loans – Disaster

SBA Loans – Disaster

Definition

Disaster Program loans are made available through the SBA for business owners as well as homeowners and renters who have been harmed in a declared disaster. For businesses, loans are available for physical damage to property suffered in a disaster. This includes actual property as well as machinery and equipment, fixtures, and inventory. Additional funds, up to an additional 20% of the loan value, are available to protect property from potentially similar future disasters. These loans are available regardless of whether or not the property was insured.

The SBA also provides loans based on economic injury related to a declared disaster. This loan is available regardless of whether or not any physical damage occurred. The SBA considers economic injury and inability to pay operating costs or meet its financial obligations.

The maximum amount available from these loans is $2 million. The length of term of these loans can be up to 30 years for repayment and interest rates are variable depending availability of alternative sources of funding. The SBA rates specify in cases where alternative funding sources are not available; loan interest rates reach a maximum of 4%. In cases where alternative funding is available, the interest rate ceiling increases to 8%.

SBA Loans – 7a

SBA Loans – 7a

Definition

The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions. 7a loans are designed to help business with special requirements.
Types of 7a Loans
• Express Programs: SBA’s Express programs offer streamlined and expedited loan procedures for particular groups of borrowers. The express programs are made up of the SBA Express, the Patriot Express, and the Export Express Loan Programs (listed as part of the Export Loan Programs).

• Export Loan Programs: SBA has placed a priority on helping small business exporters—some 70 percent of all U.S. exporters have 20 or fewer employees—with a number of loan programs specifically designed to help them develop or expand their export activities. These loan programs include the Export Working Capital Loan, the Export Express Loan, and the International Trade Loan

• Advantage and Rural Loan Programs: The Small/Rural Lender Advantage (S/RLA) initiative is designed to accommodate the unique loan processing needs of small community/rural-based lenders by simplifying and streamlining loan application process and procedures. These include the Small Loan Advantage, Community Advantage loans, Rural Lender Advantage, and the B&I Guaranteed Loan.

• Special Purpose Loan Programs: Specialty purpose Loans are designed to assist those businesses affected by NAFTA, developing Employee Stock Ownership Plans, and implementing pollution control measures. The Specialty purpose loans include the CAIP loan for borrowing costs and the CAPlines for seasonal funding needs as well as Pollution Control and Employee Trusts Loans.

What Banks Are Looking For
To be considered for a 7(a) loan, applicants must meet certain eligibility requirements. These requirements are designed to be as broad as possible so the program can accommodate the most diverse variety of small business financing needs. First, your startup must operate as a for profit company and do business in the United States or its possessions. Your entrepreneurial venture must also meet SBA size standards and not have any funds available from other sources. You, the entrepreneur, must have what the SBA determines as “good character”, management expertise, and the ability to pay the loan on time. A strong business plan is recommended as well.

SBA Loans – 7a – Express

SBA Loans – 7a – Express

Definition

The express loan programs were designed streamline the lending process for quick turn-around loans for particular groups of borrowers. The SBA also makes lower interest rates available to Express loan borrowers.

Loan Types

1. SBA Express Loans are designed for small business owners. The estimated response time to the application process is within 36 hours.

2. Patriot Express Loans are made available to veterans and active-duty service members to start or expand a small business. These loans secure the lowest interest rates available ranging from 2.25 – 4.75 percent over prime depending on amount and duration.

3. Export Express – see SBA Loans – 7a – Export

SBA Loans – 7a – Export

SBA Loans – 7a – Export

Definition

The export loan programs were designed to assist small business exporters. There are 3 specific types of loans available to help exporters, depending on their need and type of operation.

1. The Export Express Loan Program gets its namesake from its streamlined process which allows lenders to use their own forms and its promise of a response within 36 hours. Funding is available up to $500,000 for any business in operation for at least 12 months and can prove the funds will go toward supporting export development, even if prior year operations did not include exporting revenues. Funds are restricted to only those activities that enhance company exporting capability.

2. Export Working Capital Loans(EWCP) fill the hole left by U.S. banks failing to provide working capital advances on export orders, export receivables, or letters of credit. A 90% guaranty on export loans is available from the SBA with a maximum of $5 million. This program was designed specifically to encourage lenders to make capital available for these companies.

3. The International Trade Loan Program was developed for business that have experienced difficulty because of import competition and are looking for additional funds to make adjustments to remain competitive. Like the EWCP program, a 90% guaranty from the SBA is available on loans up to $5 million.

Unincorporated Association

Unincorporated Association

An unincorporated association is the least formal structure available to a non-profit organization. Generally, an unincorporated association is not involved in doing any business, but rather is united under a local community interest. For example, a volunteer organization that collects arts and crafts supplies for local elementary schools facing budget cuts and either receives the donations directly from the retailer or makes purchases with the proceeds from an annual spaghetti feed fundraising event, would probably remain an unincorporated association rather than choose to go through the process of incorporating.

An unincorporated association is exposed to more personal legal liability for the organizers, but is likely a low liability risk to begin with. An unincorporated association can purchase an insurance policy to address some of these concerns. An unincorporated association must register their name with their state’s Secretary of State office. For a registration in California, click here.

Unrelated Business Income

Unrelated Business Income

A non-profit can lose its 501(c)(3) Tax-Exempt Organization status if it generates too much unrelated business income from the exempt function of the organization. If your business idea addresses a social need but you plan on retaining a profit from your business, you can consider structuring your business as a Social Enterprise rather than a non-profit. California recently introduced two “hybrid” corporate forms for social enterprises: the Flexible-Purpose Corporation and the Benefit Corporation.

Venture Capital Firm

Venture Capital Firm

Definition

Venture Capital Firms usually invest in companies that are looking for large investments with potential for high, rapid growth and scalability. They invest large sums of money (usually in the millions of dollars) into startups, usually on the behalf of 3rd party investors. VC Firms are incredibly selective, usually investing in one firm out of several hundred. They tend to look for companies that are already launched and growing, not traditional small businesses in the prelaunch phase.

Venture Capital Firms make their money by owning large stakes of equity in the companies they are invested in. Because this means that they will not be gaining their returns until they sell their shareholdings, profits depend on the company’s growth. With the high risk involved, these firms tend to be deeply interested in the company’s development and give considerable managerial and technical advice and counsel.

Structure

Firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisers to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals, known as venture capitalists, and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund.

Roles

Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as “ venture capitalists” or “VCs”. Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience.

Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

1. Venture partners – Venture partners are expected to source potential investment opportunities (“bring in deals”) and typically are compensated only for those deals with which they are involved.

2. Principal – This is a mid-level investment professional position, and often considered a “partner-track” position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as investment banking or management consulting.

3. Associate – This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the “senior associate” position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field such as investment banking or management consulting.

4.Entrepreneur-in-residence (EIR) – EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR’s move on to executive positions within a portfolio company.

Venture Capital

Venture Capital

Definition

Venture Capital, often abbreviated as VC, is the financial capital that is invested into startup companies with high-risk and high-potential. It is a division of private equity and is sometimes referred to as “seed money”. Venture Capital is given to companies through the route of Venture capital firms or by individual venture capitalists.

Structure

Venture capital investment is often organized through Venture capital firms. These firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisers to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund.