Introduction to the Small Business Administration (SBA)

According to government surveys, over 99% of all business entities in the United States are small businesses. These businesses represent more than half of the private work force, over half of the private-sector output and over half of all commercial sales. And while this sector of the corporate structure remains the backbone of the American economy, obtaining capital financing continues to be a challenge for most small businesses.

With the advent of more stringent banking regulations, the consolidation of major banking companies, and the proliferation of interstate banking, the situation for small businesses does not seem likely to improve. Many small businesses are inadequately served by lenders who do not understand the dynamics of a small commercial enterprise. Often saddled with the requirement to handle too many responsibilities, many loan officers are not allowed to focus effectively on the attributes of the market that they serve, to understand the broad range of traditional industries and the expanding list of new business entities.

Much more often than not, crucial information about financing small businesses must be researched and understood in such diverse places as construction sites, factories, power plants, automotive shops, convenience stores, archeological sites, truck terminals, restaurant kitchens, day care centers, retail stores, and the like. These are the types of places where small business experiences actually unfold. There are important lessons to be learned on both sides of the loan transaction and, unfortunately, many loan officers tend to only view and judge from behind their desks. LOs who have not visited these different venues may unwittingly have limited their capacity to understand both the downside risks and upside potential of many small businesses.

In an effort to help the nation s grassroots enterprises with this critical dilemma, the U.S. Small Business Administration was established in 1953 by the federal government. The most important program operated by the agency is the loan guaranty program, which provides a financial guaranty to qualified, eligible businesses to enhance their ability to obtain long-term capital financing from private lending sources.

The SBA loan guaranty program has grown steadily over the years. Since 1989, with the introduction of regional bank consolidations as well as stricter federal banking regulations, the volume of SBA-guaranteed loans has more than tripled. In fiscal year 1998, for example, the agency guaranteed over $10 billion in loans to over 50,000 small businesses, which contributed directly to the creation of hundreds of thousands of jobs across the United States.

In addition to traditional banks, the emergence of many nonbank finance companies, or Small Business Lending Companies (SBLCs), has played an important role in the delivery of these SBA loans to small businesses. These nonbank companies hold a limited number of licenses to make SBA-guaranteed loans. SBLCs provide a significant portion of SBA-guaranteed loans throughout most of the country.

The SBA loan guaranty programs that are currently funded by the federal government are the 7(a) Loan Guaranty Program, the LowDoc Program and the 504 Program. They each have different standards, restrictions, and terms which we will discuss further in the article series The SBA Loan Guaranty Programs.

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