How to Fund Your Business With an SBA Loan Be sure to look into the government financial assistance programs designed to help entrepreneurs launch and grow their businesses.
- In 2020, the average SBA General Small Business Loan was $567,559.
- The SBA website offers several different loan programs designed to meet varying needs.
- Most SBA financing comes in the form of loan guarantees.
- SBIC is a program created to fill the gap between the availability of venture capital and the needs of startups.
- Specialized SBICs invest mostly in minority-owned small businesses.
This is part 6 / 10 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.
Sometimes the government really does want to help. The Small Business Administration (SBA) is devoted to helping small business people get started and run successful businesses. One of its most valuable offerings is a set of financial assistance programs that aim to help you raise the money you need to get started and keep going.
General Small Business Loans
The most popular of several SBA loan programs is the 7(a) General Small Business Loans. The maximum loan amount is $5 million, but as of 2020, the average loan was $567,599. Loans guaranteed by the SBA are assessed a guaranty fee. This fee is based on the loan's maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee, and it has the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds.
The SBA website provides a very comprehensive overview of all its loan programs and provides answers to many typical questions. Along with standard business loans, you'll find disaster loans, microloan programs, and real estate and equipment loans.
The SBA can also provide some guarantees. The 7(a) loans, for example, are backed by the full faith and credit of the U.S. government, which guarantees a lender will get back most—but not all—of the money lent out, even if the borrower can't pay. A typical loan guarantee covers 80 percent of the loan. You will find it easier to borrow money and usually get a lower finance rate if you can get an SBA guarantee.
While the SBA sometimes lends money directly to small businesses, most of its financing help is in the form of loan guarantees. To avail yourself of these programs, you need to meet the SBA's definition of a small business and put up pretty much all the business's assets as collateral. Most banks handle SBA-backed loans and can tell you more about the programs. It's easier to learn by going to the SBA.gov website and reviewing its loans. You can also visit one of the SBA district offices.
Related: Choosing A Business Loan Type
Small Business Investment Company Program
The SBA has a program that bridges the capital gap between loans (direct or guaranteed) and equity investments, which are the most difficult to find. Most banks are unwilling to offer very long-term loans (sometimes called "quasi-capital"), and most venture capital firms are unwilling to invest under $3 million in businesses that are unlikely to go public or be acquired for a fancy multiple within three to five years. Enter the Small Business Investment Company (SBIC).
Congress created the SBIC program in 1958 to fill the gap between the availability of venture capital and the needs of small businesses in startup and growth situations. SBICs, licensed and regulated by the SBA, are privately owned and managed investment firms that use their own capital plus funds borrowed at favorable rates with an SBA guarantee to make venture capital investments in small businesses.
Virtually all SBICs are profit-motivated businesses. They provide equity capital, long-term loans, debt equity investments, and management assistance to qualifying small businesses. Their incentive is the chance to share in the success of the small business as it grows and prospers.
Two Types of SBICs
There are two types of SBICs: regular SBICs and specialized SBICs, also known as 301(d) SBICs. Specialized SBICs invest in small businesses owned by entrepreneurs who are socially or economically disadvantaged, mainly members of minority groups.
The program makes funding available to all types of manufacturing and service industries. Many investment companies seek out small businesses with new products or services because of the strong growth potential of such firms. Some SBICs specialize in the field in which their management has special knowledge or competency. Most, however, consider a wide variety of investment opportunities. Go to www.sba.gov/partners/sbics for a listing of SBICs.