The 7(m) and the (504) Loan Programs for Business

The 7(m) MicroLoan Program
The 7(m) MicroLoan Program provides small loans ranging from under $100 to $25,000. Under this program, the SBA makes funds available to nonprofit intermediaries; these, in turn, make the loans. The average loan size is $10,000. Completed applications usually are processed by the intermediary in less than one week. This is a pilot program available at a limited number of locations.

Use of Proceeds.
Microloans may be used to finance machinery, equipment, fixtures and leasehold improvements. They may also be used to finance receivables and for working capital. They may not be used to pay existing debts.

Terms Interest Rates and Fees.
Depending on the earnings of your business, you may take up to six years to repay a microloan. Rates are pegged at no more than 4% over the prime rate. There is no guaranty fee.

Collateral.
Each nonprofit lending organization will have its own requirements, but must take as collateral any assets purchased with the microloan. In most cases, the personal guaranties of the business owners are also required.

Eligibility.
Virtually all types of for-profit businesses that meet SBA eligibility requirements qualify.

The Certified Development Company (504) Loan Program
The Certified Development Company (504) Loan Program enables growing businesses to secure long-term, fixed-rate financing for major fixed assets, such as land and buildings. A certified development company is a nonprofit corporation set up to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 290 CDCs nationwide.

The program is designed to enable small businesses to create and retain jobs; the CDC’s portfolio must create or retain one job for every $35,000 of debenture proceeds provided by the SBA. Typically, a 504 project includes:
A loan secured with a senior lien from a private-sector lender covering up to 50% of the project cost, A second loan secured with a junior lien from the CDC (a 100% SBA-guaranteed debenture) covering up to 40% of the project cost
A contribution of at least 10% equity by the borrower.
The maximum SBA debenture generally is $750,000 (up to $1 million in some cases).

Use of Proceeds.
Proceeds from 504 loans must be used for fixed-asset projects such as:
Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping, Construction, modernizing, renovating or converting existing facilities, Purchasing machinery and equipment.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or most refinancing.

Terms, Interest Rates and Fees.
Interest rates on 504 loans are based on the current market rate for five-year and 10-year U.S. Treasury issues plus an increment above the Treasury rate, based on market conditions. Only maturates of 10 and 20 years are available. Fees total approximately 3% of the debenture and may be financed with the loan.

Collateral.
Generally the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

Eligibility.
To be eligible, the business generally must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $6 million and does not have an average net income in excess of $2 million after taxes for the preceding two years, or if it meets standard 7(a) criteria. Loans cannot be made to businesses engaged in speculation or investment.

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