Small Business Management
The Small Business Administration (SBA) strives to protect and strengthen the interests of small business in the United States. Not only does it have many financing programs, it also offers many others such as legal help, government contracting and disaster assistance. The following programs are designed to help finance both start-up and existing businesses that do not qualify for traditional loans.
Capital access programs (CAPs)
CAPs are designed to generate more funding for businesses that do not qualify for loans. The office of Capital Access works with financial institutions to reach these small businesses and offers them access to capital, following certain terms and conditions to make that there is sufficient monitoring and oversight (Office of capital access About-us). Small businesses can use CAPs by contacting a lender that is participating in the program who will them conduct their own loan application process and determine specific loan terms. An example is the New York State’s capital access program, which is a newly expanded $19 million dollar program. To incentivise small business lending, the New York State provides funding to financial institutions for loan loss reserves. This CAP has largely increased not only on the amount of capital but also on the number of institutions that can join the program (Empire State Development).
Revolving Loan Funds (RLFs)
RLFs are a source of financing for the development and expansion of small businesses. The main characteristic of RLFs is that they replenish themselves, meaning that they use interests and initial payments on old loans to issue new ones. Small business often use these loans to bridge the gap between the limited amount they can access through traditional loans on the private market and the actual capital they need to sustain their business (CDFA - Revolving Loan Fund). When elaborating these funds, it is crucial to make sure that they are based on reasonably interest rate so as to not be perceived as easy sources of capital and small businesses use the money soundly. It is also very important that the funds are capable of self-replenishing its funds for future allocation. Typical suitable uses for these loans include new construction, landscape and propriety renovation or acquisition of machinery and equipment. An example of a RLF is the Cascadia Loan Fund, which offers loans in the Washington and Oregon area and is primarily funded through individual donations and investments. From 1985 to 2003, this fund provided 434 loans, amounting to a total of $29 million. The default rate for this RLF is extremely low (1%) partly because the small businesses are given customized technical assistance and closely monitored to ensure success (CDFA - Revolving Loan Funds).
7(a) Loan program
This program is the SBA’s main fund to small businesses that are finding it difficult obtaining capital through regular loan channels. The name originates from the 7(a) section of the Small Business acts, which permits the SBA to issue such loans to small American businesses. These loans are the most basic and flexible category of loans as financing can be obtained for a whole array of general business purposes such as furniture and fixtures, leasehold improvements and debt refinancing (under specific conditions). Most American financial institutions are a part of the program and agree to structure the loans according to the SBA’s requirements, as long as they receive a guaranty from the latter on a portion of the loan. The guaranty is shared between the SBA and the financial institutions, it is against payment default; it does not cover imprudent decisions by the lender or misrepresentation by the borrower.
CDC/ 504 loan (Certified development company/ 504 loan)
This program is a long-term financing instrument, designed to provide capital for the purchase of fixed assets such as buildings...
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