Small Business Administration Loan Guarantee

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Small Business Administration Loan Guarantee

The Small Business Administration (SBA) is a principal federal agency involved in import and export promotion. The four primary activities are undertaken by the organization that aims to promote small business exports consist of outreach, counseling, and training, trade leads, and financing. However, this paper seeks to evaluate the small business import-export market in the U.S. and how the SBA finances such enterprises through its several loan guarantee programs. Furthermore, it is essential to note that the SBA Loan Guarantee places more emphasis on the potential of small business export promotion programs. Thus this paper will also be more inclined towards this aspect as compared to the import industry.

Overview of U.S. Small Business Imports and Exports

The U.S. international market is a significant economic driver. Moreover, such markets are subject to faster growth and are more resilient to the changing faces of the economy. According to the U.S. Census Bureau, in 2017, 97.5% of companies exporting manufactured products were small businesses (1). This suggests that the American small businesses which support numerous jobs, totaling approximately 84.7 million, possess the innovation and entrepreneurial spirit required to drive the economy (Baughman and Francois 9). Furthermore, regardless of their high concentration, small and medium-sized enterprises (SMEs) only account for nearly one-quarter of the value of U.S. merchandise exports. This illustrates that opportunities are still existent in the small business export industry. It is evident that entrepreneurs realize the benefits of trade; therefore, it is essential to assist them in harnessing the power of commerce to grow their business.

Role of the SBA in Financing Small Business Imports and Exports

In the current market, access to capital is essential, and the SBA plays a crucial role in providing such resources to support small business international trade businesses. Expanding beyond the domestic borders requires substantial initial capital investment, which is not easy for many small business owners. Therefore, through the Office of International Trade (OIT), the SBA can provide the necessary service to its target audience (Lowry 3). The OIT is an entity under the SBA whose primary responsibility is to coordinate the import-export promotions that the SBA offers. The OIT provides loan guarantees that enable small business importers and exporters to secure funding from private lenders in the form of facilities developmental loans for fixed assets and working capital loans for operations.

Export Promotion-Focused Loan Programs

The SBA loan guarantee program provides loans to support small businesses in international trade. Similar to other non-import or export SBA loans, the loans require the participation of a lender, which in this case is usually a banking institution. Nonetheless, they warrant up to 90 % of the loan, while the former warrants a range between 50-75 % of the loan amount (Lowry 6). To be eligible for an SBA Import-Export loan, a business has first to meet the SBAs definition of a small business, which differs industry-wise. However, it applies to companies having a tangible net worth of $15 million or less and net income after taxes for the previous two years of $5 million or less (Lowry 6). SBA offers small business loans and line of credit through three loan guarantee programs:

Export Working Capital Program (EWCP)

The EWCP supports small businesses in the export industry by offering working capital to enable them to fulfill their export operations. These include purchasing inventory to cater for export sales, paying suppliers, handling long customer payment cycles, and financing production. It is structured to guarantee loans up to a maximum limit of $5 million (Lowry 6). The duration of the export working capital loan processing is often up to 10 business days (Lowry 6). To qualify for the EWCP, small businesses have to meet several requirements: they are required to have been in operation for a minimum of a year, the export activity has to be existent in a foreign market, the export activity is insufficient to fund offshore operations, and a comprehensive one-year business plan illustrating how the proceeds from the loan will be used to be presented.

Export Express Loan

The eligibility requirements for the export express loan is similar to that of EWCP. It is regarded as the most straightforward and flexible export loan offered by the SBA as it covers a variety of functions, for instance, the acquisition of fixed assets, market development, and refinancing of other export loans. The loan is typically defined as a term loan or line of credit and guarantees up to a $500,000 loan cap (Lowry 6). Most notably, the feature of this program that is distinct is its speed of processing. The processing time for this loan guarantee is as little as 36 hours if specific criteria are met (Lowry 6). Furthermore, the SBA guarantee is significant, with 50% for loans under $500,000 and 90% for loans up to $350,000 (Lowry 6).

International Trade Loan

The SBA International Trade Loan program functions to assist SMEs to enter or expand the small-scale export industry or in strategically investing to compete with other exporters. This loan program provides a variety of finances that cover fixed asset acquisition, debt refinancing, and working capital, amounting to $5 million (Lowry 6). The structure of the loan is associated with the utilization of proceeds and particular repayment terms (up to 10 years for leasehold improvements and equipment, and up to 25 years for real estate) (Lowry 6). The SBA guarantee is up to 90% of the $5 million loan cap and is bound by requirements similar to those of other programs.

Other Loan programs

In addition to the three SBA export loan programs mentioned above, there are other available promotional loan programs through which the SBA supports small business exports. These include the Certified Development Company (CDC)/504 program, the standard 7(a) program.

CDC/504 program

This program aims to provide long-term financing to small businesses that intend to purchase equipment or acquire new facilities to appraise the existing locations. Under the SBA, the CDC/504 program guarantees loans that cover 40% of the project cost, in which the maximum limit is often $5 million (Lowry 6). It is essential to note that the loans do not come directly from the SBA; instead, they are offered by local non-profit organizations that the SBA has selected as Certified Development Companies. The small business importer or exporter is expected to contribute 10% out-of-pocket, while the private sector lender, who is often a bank, will provide the other 50% (Lowry 6). Moreover, the program has job creation requirements. The CDC/504 program can be further categorized into the Accredited Lenders Program (ALP), the Certified Lenders Program (CLP), and the CDC/504 refinancing option. All these sub-categorized programs oversee the processing, closing, and servicing of CDC/504 loans.

7(a) Loan Guarantee program

It is usually used to finance the working capital for small businesses. According to Export Products, it is regarded as the most basic SBA loan program and is among the popular loan programs provided by the agency. It has several categories; however, in relation to the export industry, the most relevant categories include the Export Express, the Export Working Capital Program, and the International Trade Export program. The Export Express is suitable for small companies with the intent to internationalize or expand their current export operations. On the other hand, the Export Working Capital Program secures short-term working capital loans to exporters. Lastly, the International Trade Export Program is used to provide term loans for permanent working capital to exporters. The primary SBA loan guarantee programs share similar characteristics with the 7(a) guarantee loan program. For instance, the SBA Express program is comparable to the Export Express program, with the exception that the former has a lesser maximum loan limit, an expedited approval process, and a smaller percentage of the guaranteed loan. Likewise, the SBAs International Trade loan program has several characteristics that are similar to the Export Express program. These include a more reduced percentage of guarantee and a rushed approval process in exchange for a lesser maximum loan limit.

Conclusion

The SBAs various loan guarantee programs have funded thousands of small enterprises in the U.S., which were incapable of securing loans from other funding institutions on their own. This aligns with SBAs eligibility requirements which are to provide loans to businesses that are unable to independently acquire loans. The availability of such readily available funding coupled with the trend of small business import and export industry in the U.S. will pave the way for further increase of the industry and encourage the SBAs lending partners to expand their loan programs.

Works Cited

Baughman, Laura, and Joseph Francois. Growing Small Business Exports: How Technology Strengthens American Trade. 2019, Web.

Export Products. U.S. Small Business Administration, 2019.

Lowry, Sean. Small Business Administration Trade and Export Promotion Programs. Congressional Research Service. 2014.

U.S. Census Bureau. Preliminary Profile of U.S. Exporting Companies, 2017. 2019, Web.

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