The Small Business Administration (SBA) has a simple, heartening mission: to secure financing for small businesses that might not otherwise be able to obtain it, but that still have a good chance of succeeding. True to this mission, some SBA loans have less stringent requirements for owner's equity and collateral than do commercial loans, making the SBA an excellent source of financing for start-ups and young businesses.
The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, experience in the industry or other evidence of management ability, collateral and owner's equity contributions. If you own 20 percent or more equity in the business, the SBA asks that you personally guarantee the loan. After all, you can't ask it to back you if you're not willing to back yourself.
Here's a breakdown of the SBA's various programs:
The 7(a) Loan Guarantee Program
The general SBA loan program is officially known as the 7(a) Loan Guarantee Program. This means the SBA guarantees business loans rather than makes them. You still have to borrow the money from a bank or another lender, but the SBA guarantee increases your chances of getting the funds. The highest possible guarantee is normally $750,000 or 75 percent of the total loan amount, whichever is less. For loans of less than $100,000, the guarantee usually tops out at 80 percent of the total loan.
SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. Still, you can expect to pay a one-time guarantee fee and a yearly servicing fee, which the agency charges the lender and allows the lender to pass on to you.
The LowDoc Program
A general loan may suit your business's needs best, but the 7(a) program also offers several specialized loans. The LowDoc Program promises quick processing for amounts less than $100,000. "LowDoc" stands for "low documentation," and approval relies heavily on your personal credit rating and the business's cash flow. "The LowDoc is probably the closest you'll get these days to a good, old-fashioned character loan," says Al Stubblefield of the SBA. That fact, combined with the favorable interest rates, fees and maturity terms offered by the SBA, makes the LowDoc an unusually good deal in today's loan marketplace.
The Fastrak Program
The Fastrak Program is a close cousin of the LowDoc, but gets you an answer even quicker, because approved Fastrak lenders do the paperwork themselves and don't have to wait for SBA approval. Though still a pilot program, Fastrak is up and running in many regions.
For businesses that need working capital on a short-term or cyclical basis, the SBA has a collection of revolving and nonrevolving lines of credit called Caplines. A revolving loan is similar to a credit card, where you carry a balance that goes up or down, depending on payments and amounts borrowed. With nonrevolving lines of credit, you borrow a flat amount and pay it off over a set period of time.
Women and Minority Loans
The SBA offers assistance for some would-be entrepreneurs with its Minority and Women's Prequalification Pilot Loan Programs. The women's program uses nonprofit intermediaries, while the Minority program uses both nonprofit and for-profit intermediaries. For-profit intermediaries may charge more for loan packaging, so this is another good place to shop for deals. Not that you can't get your money's worth--conscientious intermediaries help borrowers develop their applications, then send the paperwork to the SBA, where it's rushed through. Usually within three days, the SBA issues a letter of pre-qualification, and the intermediary helps the borrower shop for the best loan. The maximum amount for these "Prequal" loans is usually $250,000, although some SBA districts vary the limits on minority loans.
The Microloan Program
As comprehensive as all that sounds, SBA financing isn't limited to the 7(a) group of loans. The Microloan Program is administered by nonprofit intermediaries that will often walk you through writing your business plan and taking inventory of your business skills. "Micro" means less than $25,000 and a carries a fairly short term, although maturity terms vary, as do interest rates. Microloans take little time to process--often less than a week. The greatest advantage of the microloan is that it can be easier to get than a loan from a commercial bank. The only downside is that the Microloan Program isn't available in all regions.
504 CDC Loan Program
On the opposite end of the loan-size spectrum is the 504 Certified Development Company (CDC) Program. Fixed-rate loans for long-term fixed assets, usually real estate and equipment, 504s are used most often for growth and expansion. A CDC is a nonprofit intermediary that works with the SBA, banks and businesses looking for financing. There are CDCs throughout the country, each covering an assigned region. If you're seeking funds to buy or renovate a building or put in some major equipment, consider bringing your business plan and financial statements to a CDC. Typical percentages for this type of package are 50 percent financed by the bank, 40 percent by the CDC and 10 percent by the business.
In exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or to meet certain public policy goals. Businesses that meet these policy goals are those whose expansion will contribute to a business district revitalization, such as an Enterprise Zone; a minority-owned business; an export or manufacturing company; or a company whose expansion will contribute to rural development. Additional public policy goals are the promotion of enhanced economic competition, including the advancement of technology, which covers plant retooling or modernization, and even conversion to robotics. Other categories of companies that qualify are those that compete with imports and those affected by cutbacks in defense spending or by military base closures.
"With any start-up, lenders are looking for an experienced principal to run the company," says Jacklyn Jordan, president of the California Bay Area CDC Capital Access Group. "They want experience in that industry or closely related experience that would apply to running that type of business."
SBICs and SSBICs
The SBA also licenses for-profit intermediaries, known as Small Business Investment Companies (SBICs). SBICs are privately owned venture-capital firms that invest their own capital, along with money they've borrowed at favorable rates from the government. If you think working with venture-capital investors will get your business off the ground--and you don't mind giving up some equity--ask about SBICs. In addition to helping you finance your business, some SBICs also offer management services. Because they take a vested interest in companies they invest in, they look at everything from inventory to cost control, hiring practices and location. Some SBICs only lend in industries they know; others will lend across the board.
Your head may be swimming now with all these acronyms, but you should also know about Specialized Small Business Investment Companies (SSBICs), which serve socially and economically disadvantaged entrepreneurs by investing in companies owned in economically depressed areas, and those owned by women and minorities.
Disaster Assistance Loans
There's one last category of SBA loan that you should know about but hope you'll never need--Disaster Assistance loans. These are the only loans the SBA makes directly, and the stated goal of the program is to offer long-term disaster assistance. This means the loans can carry up to a 30-year maturity, depending upon yourability to repay the loan. You should use any insurance funds first, but the SBA will make a loan with the stipulation that your insurance proceeds, when you receive them, will be used to repay the loan. The SBA Disaster Assistance program includes two loans targeted to small businesses. Economic Injury Disaster Loans provide working capital for a company until it can reopen its doors. Business Physical Disaster Loans can be used to replace or repair damaged business property. They have a maximum lending limit of $1.5 million.
Hopefully, you'll be approaching the SBA with the much happier prospect of starting or expanding a business. To help you get the most out of the SBA business-loan programs, Stubblefield offers these insider's tips: "Be polite, be persistent and be prepared. Have all your ducks lined up in a row before you go to the bank," he says. The type of paperwork you'll be asked to bring to the bank will vary with the kind of loan you're requesting, but, for a start-up, you'll probably need to bring a projected cash flow statement, itemized use of proceeds, personal tax returns and, of course, a business plan.
Stubblefield suggests writing a simple, direct plan. "Tell us you've got a widget, tell us who's going to buy it, and tell us how you're going to get it to them," he says.
"The biggest mistake people can make is admitting to the bank they don't know how much money they need," Jordan says. Be prepared to explain how much money you'll need to borrow and what you will use it for.
One of the most valuable aspects of the SBA is that it can help you "line up your ducks." SBA services include many free resources to help you with such tasks as writing a business plan and sharpening your presentation. This type of help, along with the wide array of SBA loans, gives you a good chance of finding the right loan for your business.
To find out more about the SBA, surf over to their Web site at http://www.sbaonline.sba.gov/ , or call the SBA Answer Desk at (800) U-ASK-SBA to hear recorded messages. Check your phone book or ask your librarian for the phone number of your local district office. There's at least one district office in every state, and it will be able to mail you a start-up booklet and a list of lenders. Your district office can also tell you about specialized loans tailored to your industry and where to go if you need help polishing your business plan or gathering your financial statements.