Small business owners are the founders of the American economy. Their efforts, entrepreneurial spirit and healthy appetite for risk generate about half of the private sector’s GDP. Therefore, it is not surprising that the state is trying to provide this segment of business with maximum financial and administrative support.
Do not think that the American small business venture is 100% guaranteed success. 69% of small newcomers in the United States survive to the age of two, and only 51% survive to the 5th anniversary. However, the number of survivors is impressive. By some estimates, 22 million American companies are small businesses and only 14,000 become really huge. But, first of all, you need to decide what is meant by small business in America.
Estimates on this score vary. For example, to qualify for tax breaks, a company must have fewer than 25 full-time employees, and the average salary must be below $ 50,000 per year. In some cases, the bar rises significantly higher and it is said about 700 and even about 1,500 workers. Much depends on the specific industry. Nevertheless, legitimate parameters have taken shape. According to them, small businesses in the United States include manufacturing firms with a staff of less than 500 people and non-manufacturing companies with sales of less than $ 7.5 million per year.
Small business support
Back in 1953, the United States passed the Small Business Act and established the Small Business Administration (SBA). Under Republican presidents, there have been repeated attempts to liquidate this institution or at least cut its powers and budget, but each time they met with staunch resistance from Congress.
As a result, the Small Business Administration has managed to survive as a powerful federal agency. Its top leaders are approved by the Senate. And Bill Clinton, during his presidency, even raised the status of the head of the SBA to the level of a cabinet member, thereby equating the agency with the most influential ministries.
The SBA has offices in all 50 states and all counties. Its budget is funded by the American Congress. And the main areas of competence can be designated by an abbreviation consisting of three letters “C” – consulting, contracts, credit. In terms of starting and expanding small businesses, funding is predominant.
Credit 7a and other loans
The small business administration has been given the opportunity to carry out direct lending at public expense. But the most popular and in demand is another financial product – lending against government guarantees. In the business environment, it is known as program 7 (a) – by the number of the corresponding article in the small business law.
The mechanism of action of such borrowings is quite simple. One of the banks in partnership with the SBA provides an entrepreneur with a loan to establish a new or expand an existing business. The agency, in turn, guarantees a return of up to 90% of the issued funds if the borrower goes bankrupt. Under Barack Obama, the limit on one such loan was raised from 2 to 5 million dollars.
It is clear that the SBA does not issue guarantees for every person. As for, for example, already existing companies, very strict selection principles have been established. The business must have existed for at least two years, be profitable, and have generated at least $ 50,000 in revenue in the last 12 months.
In exchange for the aforementioned strictness, dictated by quite justified prudence, the agency sets the maximum permissible interest rates on loans.
With a loan term of less than 7 years, the marginal rate for a loan of up to $25, 000 will be 8.5%. If the loan is to be repaid for 7 years or more, it will reach the maximum possible 9%. If the amount is over $50,000 the rate will be 6.5 or 7%, respectively.
Loans are also ensured for the replenishment of fixed assets – the construction or acquisition of production facilities and the purchase of industrial equipment (Fixed Asset Financing Program). Such borrowing is carried out through a network of Certified Development Companies (CDC), not-for-profit.
Under the terms of the program, the borrower assumes 10% of all costs. Another 50% is provided by a bank or other credit institution under a 100% SBA guarantee. The remaining 40% is provided by CDC also under the government obligation of full refund.
Local business support
At the local level, there is a program called the State Small Business Credit Initiative (SSBCI). It is being implemented under the action of the US Treasury Department. State governments select applicants for the program based on local terms and needs. They also determine the size of interest rates on loans and guarantee creditors a return of at least part of the invested funds.
The specific loan terms vary from state to state and from loan to loan. In the overwhelming majority of cases, the amount of guarantees does not exceed 80% of the loan amount. The rest is the personal risk of the borrower.
This is how this program works, for example, in California. Loan guarantees are provided by 11 local non-profit Small Business Financial Development Corporations (FDCs). To cover potential risks, a reserve fund of $ 26 million was formed. Usually, guarantees cover 75% of the loan amount, but should not exceed $500,000 in each case.
It is estimated that 800-1000 Californian entrepreneurs can benefit from the SSBCI program annually. At the same time, the average amount of guarantees is $250,000, and the maximum loan term does not exceed 7 years.