In light of often contradictory federal banking regulations, it is doubtful that the private sector would fulfill the demand for small business financing without assistance from the SBA. The agency provides the private sector lender with a financial enhancement to permit the extension of credit that would otherwise be unavailable.

The program essentially allows the lender to apply to the agency for a guaranty for a portion of a small business loan. The agency considers this application based on a set of eligibility standards that defines the characteristics of borrowers permitted to receive this assistance. There are also some restrictions on how the proceeds of these guaranteed loans may be used.

The lender actually provides the funding for the loan and will always have direct exposure for a constant percentage of the outstanding principal balance. The lender will be the primary contact for the borrower in servicing the loan account.

Unless the loan is not repaid as agreed, the borrower may never be aware of the presence of the SBA after the loan closing. The borrower is not involved directly with the agency unless there is a loan default. The agency may then be required to buy the guaranteed portion of the loan from the lender and initiate collection efforts directly with the borrower.

Since the agency rarely meets the borrower or visits the business, the SBA must rely on the written application of the lender in order to approve the lender’s request for a guaranty. The requirements for this application include an extensive list of information designed to ensure the borrower’s compliance with myriad financial, regulatory, and business qualifications which reduce the lender’s exposure to default.

These guarantees are available to small business owners, regardless of age, gender, or ethnic group. When approved, the guaranty is provided under a standard SBA authorization agreement executed by the lender and the SBA, similar to the lender’s loan agreement with the borrower. Borrowers utilizing the SBA program are not more susceptible to being scrutinized by or subject to attention from any other federal agency.

Any federal or state chartered bank is capable of participating in the SBA loan guaranty programs. In addition, there are a limited number of SBA-licensed nonbank lenders that have the capability to make SBA-guaranteed loans. Each lender is required to enter into a Participation Agreement (Form 750), which outlines the lender’s agreement to comply with the program regulations.

These lenders have many benefits available to them through participation in the loan guaranty programs. For example, the financial guaranty permits lenders to enter into lending transactions with noncredit risks that otherwise might prevent them from being able to accommodate the borrower. These risks might involve longer loan terms, the type of industry (such as recreational facilities or convenience stores), or the type of collateral used to secure the loan (such as single-purpose real estate improvements or specialized equipment).

In addition, the SBA guaranty carries the full faith and credit of the federal government, enabling lenders to sell the guaranteed portions of these loans to investors and provide some liquidity to the lender’s loan portfolio. This feature is particularly important to smaller community-sized banks, which may have limited capital with which to expand.

The SBA loan guaranty programs are administered by over sixty district offices located throughout the country and are managed by a district director. Supervision of the 7(a) program is managed by the finance chief in each district. These districts are organized into ten regions, which are headed by a politically appointed regional director, who is involved with broader policy issues involving the agency. A complete list of SBA District Offices is included in the Appendix.

The agency operates the loan guaranty programs under a common set of rules known as the Standard Operating Procedures (SOPs). In theory, lenders should be able to expect uniform implementation of the SOPs throughout any region or district office in the country, but such consistency is not always the case.

Each district office has a great deal of latitude in implementing the SOP and determining policy for administering the program. Some districts are more stringent than others in the interpretation of the SOP. While these differences can lead to some frustration among lenders serving multiple markets, most borrowers are not affected beyond the restrictions of their particular district office.

Regulatory authority for the Small Business Administration and the general regulations of its business credit programs are drawn from the Code of Federal Regulations, Volume 13, Business Credit and Assistance.

There are many Web sites which have been opened over the past few years to give small business owners access to services and information offered by the Small Business Administration. Other sites offer information helpful to small businesses seeking financing. A list of some of these sites can be found in the Appendix.

* Source The SBA Loan Book

The comprehensive handbook for obtaining a Small Business Administration guaranteed loan.