Government-backed loans expand credit options for small businesses


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Ask a Lender
September 25, 2017


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Key Points

Government-backed loans

  • The programs: Government-sponsored enterprises, the U.S. Small Business Administration and the U.S. Department of Agriculture operate lending programs.
  • The proceeds: Loan amounts or guarantees range from a few thousand dollars in microloans to millions of dollars for business expansions.
  • The process: Most lending decisions and funding come from private lenders that rely on the government to guarantee or purchase their loans.

The federal government plays an important role in expanding the availability of credit to the nation’s small businesses.

Its greatest influence is exercised through Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that support mortgage lending; and the U.S. Small Business Administration (SBA), which guarantees a broad range of commercial loans.

GSEs help finance billions of dollars in business-related real estate loans, primarily through programs that focus on multifamily housing. SBA programs guarantee loans, including commercial property mortgages, that allow entrepreneurs to start or expand businesses. Also, rural areas are assisted with federally backed loans that support farms, ranches and residences, as well as nonagricultural businesses.

With these programs, instead of applying directly to the government or quasi-government agencies, borrowers do business with banks or other private lenders, which review loan applications and rely on the federal agencies or GSEs to guarantee loans or to purchase and securitize them.

Following are some popular government-supported lending programs.

GSEs and SBA

GSE multifamily lending: Fannie Mae and Freddie Mac back billions of dollars in multifamily loans each year and hold just less than half of all multifamily debt in the United States. Fannie and Freddie also sponsor lending programs that target affordable housing, student housing and senior housing, including long-term care facilities, as well as energy-efficient multifamily housing.

Although banks and other lenders make the decisions on whether to fund the loans, lenders act on guidelines set by GSEs. If Fannie and Freddie think the loans are a good risk, those organizations buy loans from the banks, package and securitize them, and then sell the resulting mortgage-backed securities to investors through the secondary market.

If you are interested in funding affordable-housing or “green” environment-friendly projects, GSEs have some incentive to do business with you. Congress has set caps on how much multifamily lending the GSEs can support each year, but loans for affordable-housing and energy-efficient projects are among the niches exempt from those limits.

SBA 7(a) program: The SBA's largest commercial loan-guarantee program, 7(a) loans may be used for a range of business activities, including paying for operations and inventory, construction, refinancing debt, and buying or renovating commercial real estate. The maximum loan amount permitted under the program is $5 million; the average loan amount is roughly $350,000.

Like other SBA programs, 7(a) reduces business-lending risk for banks. The SBA guarantees as much as 85 percent of a loan up to $175,000 — and up to 75 percent for loans exceeding $150,000. Borrowers negotiate interest rates with approved lenders, although the SBA sets some parameters. On loans of less than seven years, lenders can charge the prime rate plus 2.25 percent. On loans longer than seven years, the maximum is the prime rate plus 2.75 percent. Maximum rates are higher for loans of $50,000 or less.

SBA CDC/504 program: Designed for financing land, buildings and other fixed assets, the CDC/504 program is available to small-business owners who can show that the loan proceeds will be used to create or preserve jobs. Under the 504 loan program, SBA-approved nonprofit corporations — known as certified development companies (CDCs) — join with banks or other lenders to provide financing that covers up to 90 percent of a project's cost. There are 270 CDCs in the U.S.

SBA Microloans: For small investments in inventory, supplies, furniture, fixtures, machinery or equipment, there is the SBA microloan program. The program funds loans to a maximum of $50,000, and the average loan size is $13,000. Borrowers have up to six years to pay back the loans, and interest rates are usually between 8 percent and 13 percent. The SBA provides the funds, and nonprofit agencies, known as intermediary lenders, make the lending decisions.

Other programs

USDA B&I program: Although the U.S. Department of Agriculture (USDA) oversees it, the business and industry (B&I)  loan program is not exclusively for agricultural businesses. Most small businesses located in rural areas are eligible for the loans, which can be for terms as long as 30 years. Borrowers and banks negotiate the interest rates, and the USDA guarantees between 60 percent and 80 percent of the loan amount. Prospective borrowers can type a business address into a search engine on the USDA website to determine whether that business is in a loan-eligible rural area.

Farmer Mac: The Federal Agriculture Mortgage Corp. is a rural GSE that buys and securitizes commercial farm, ranch and rural utility loans from lenders who review, approve and extend the credit. Like Fannie and Freddie, Farmer Mac is privately held but subject to federal oversight — in this case, by the Farm Credit Administration.

Disaster loans: The SBA makes available to businesses low-interest loans of up to $2 million to pay for disaster recovery and economic injury related to declared disasters. The loans can be used to repair or replace real estate, equipment and other business assets. Also, the USDA will loan up to $500,000 to cover losses to rural businesses in designated disaster areas under a program administered by the federal Farm Service Agency.


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