Entering into the new year is always a prospect laced with uncertainty and excitement for most small businesses. And while entrepreneurs have always encountered risk, business owners rarely consider today’s federal and state governments as a hedge. Anyone who remembers the annual Congressional budgetary battles can understand why. We nevertheless have identified and summarized for your reading pleasure a handful of public programs that small business owners in the Commonwealth might consider for additional capital.
The General SBA Small Business Loan under 7(a)
This loan, named after the same provision of the Small Business Act, is the most common loan that the Federal Small Business Association provides. The agency maintains a list of general requirements that enjoy wide discretion (e.g. that the business be small and demonstrate need), with a more specific list of items making a business ineligible; Lenders, general real estate developers, religious groups, private clubs and more doing business in Massachusetts will not be able to obtain this loan.
These loans can be used generally for expansionary reasons; acquiring buildings or equipment to increase capacity or production are common examples. Other special qualifications include what the agency has developed for specific problems, one for instance is available to companies that are or were negatively affected by NAFTA. Funds are usually applied for between $50,000 and $5 million for any given loan, but there is no minimum. The average loan for 2012 loans made under 7(a) was about $340,000.
The cost of borrowing under SBA’s 7(a) is competitive with ordinary business loans from Massachusetts banks. While the interest rate is negotiated between the lender and borrower and usually variable, the ultimate cost is limited by SBA maximums. A minimum 10% down payment is necessary, and a guarantee fee is also assessed, initially paid by the lender but ultimately passed on the borrower. In 2015 these fees range from 0-3.5 percent on loans between $0 and $700,000 on a graduated scale. Loans over $1 million are subject to an additional .25 percent.
The SBA Microloan Program
This program is probably best characterized as one that provides seed money, or funds available for the very beginning stages of an enterprise. From a business owner’s standpoint, where the interest rate will range between 8-13%, it is probably best to consider this loan as a short term liability to be paid off within a year or two (though up to 6 years might be possible). In the meantime, all things equal, it should probably be a focus for the owner to obtain a more substantial investment.
The loan amounts are capped at $50,000, and are applicable to working capital, inventory and supplies, and fixtures and equipment. Like other loans they are not available to use for real estate or past debts. The process is handled through an intermediary that qualifies with the SBA, and an updated list is released on the agency’s website each year. Given the amount available, with the high interest rates, and the application process generally, these microloans are naturally not the most popular in the SBA quiver.
Real Estate & Equipment Loans under 504
These loans are of the more common variety and while similar to the 7(a) in purpose (general expansion, real estate purchases, inventory & equipment), the amount lent can be substantially larger. It is generally recommended over a 7(a) loan for purchasing commercial real estate and heavy machinery, while the 7(a) is more appropriate for short term working capital, supplies, furniture and fixtures.
Additionally, a 504 loan will require that the Massachusetts business work with a bank directly to secure 50% of the financing privately as part of the package. The other 40% will be serviced by a CDC (local “Certified Development Company”), with a 10% down payment from the borrower. There are a whole host of fees associated with these loans, including for the CDC servicing, for the CDC’s transactional attorney fees, for the bank’s servicing its loan, and the bank’s Massachusetts business lawyer fees. These fees are substantial but they can be financed.
Disaster Loans for Impacted Businesses
As the name describes, businesses seeking this type of loan must qualify based on its location within a declared disaster area. Being a mess does not qualify, nor does being located within an undeclared disaster area unfortunately. Generally, the declaration would be declared and publicized by the President and FEMA (Federal Emergency Management Agency), respectively.
Because of the hardship involved, the SBA is usually the lender of last resort and offers thefunds on a long-term, low-interest basis. The loan can cover not only damage to personal property and real estate, but also economic injury generally suffered by the business. Framed within the context of Hurricane Sandy, this might cover flood damage to inventory and the storefront, but also costs of operations where customers were unable to access the business due to road, electric grid or other infrastructure damages.
Additionally, these funds are available to Massachusetts residents who do not own a business but have simply suffered home and or property damage within a declared area. To apply for any disaster loan an applicant will need to submit IRS form 8821, a FEMA registration number obtained at disasterassistance.gov, and other contact and identity information. A recovery center is ordinarily established in or around the declared disaster area to handle this process as well.
Massachusetts Small Business Grants
Of particular interest in the list of funds available to Massachusetts small businesses are several categories of small business grants, a.k.a. “free money.” These categories are not necessarily as permanent as the federal loans available, and usually change with the government’s choice of industries to emphasize. The Commonwealth currently offers grants for Safety Training, Employee Training, MA STEP (State Trade and Export Promotion for international business), Targeted Technologies Research Funding Contracts, and other life science related grants.
Venture and other Capital Based Options
There are other opportunities available from various quasi-public entities to obtain investment capital in growing businesses. Because these opportunities change so often, it is best to approach each entity individually to obtain the most up-to-date information.
As an example, the organization “Mass Ventures” at mass-ventures.com/entrepreneurs looks to support innovative companies that have high growth potential and a good chance of expanding job opportunities for Massachusetts residents. Other organizations of this kind include the New England Venture Capital Association and the Massachusetts Clean Energy Center (with an obvious focus).
Whatever funds a business owner seeks (or combination of funds), the essential ingredient in navigating these financing options will inevitably an experienced Massachusetts business attorney. Call our office today for a free consultation on the best options available to your business.