Business Financing Articles
How to Borrow from the SBA
Think of it as the Fort Knox for small-business loans. Many businesses do.
The U.S. Small Business Administration (SBA) in some ways serves as the cash cow for fledgling businesses through the agency's myriad loan guarantees and direct grants, resulting in an overall portfolio of more than $45 billion.
Whether you're shopping for startup financing or expansion capital, the SBA should be a destination. In a moment, I'm going to give you a guided tour of the various options available to business owners.
But understand this: Though the SBA is in business to help you, and agency-backed loans arguably are easier to secure than conventional financing, borrowers still must demonstrate that they are credit worthy. Understand also that there will be competition for the loan guarantees and grants.
"An individual needs to be sure his credit history is unblemished, or, if there were problems, that they've been taken care of," says Jane Palsgrove Butler, who oversees entrepreneurial development for the SBA.
Also needed is a thorough understanding of the business for which funds are being sought. Says Butler: "If the lender asks the borrower what the break-even point is and they don't know, it is not a good thing."
That's the sobering news. The good news is that the SBA funds assistance programs aimed at helping cash-strapped entrepreneurs put their best borrowing foot forward.
Here's a rundown of the various SBA programs that might make it easier for you to launch a business, or to keep one afloat. The "Financing Your Business" section of the SBA's Web site provides a clear summary of what's available. Let's begin with loans to your business, as opposed to SBA-sponsored investments in it, which I'll get to in a bit.
Those are the general parameters, but there are a couple of specific 7(a) products you should be aware of:
1. LowDoc. SBA-authorized lenders who practice "relationship lending" — that is, they really know the people they're lending to and whether they're credit worthy — are empowered to make loans with less documentation than normally is required. Obviously, this speeds up the process. LowDoc loans top out at $150,000.
2. SBAExpress. If you're really in a hurry, consider this product, which gives the lender full authority over the loan process, with no input from the SBA. "We turn these loans around literally in hours," Butler says. Because it is relinquishing control, the SBA covers only 50% of Express loans, which cannot exceed $250,000.
There are lesser-known programs that are of potential value, depending on your particular situation.
• The 504 loan program. This is fixed-asset lending, generally secured by your plant or physical building, though long-term capital equipment also may qualify. It works like this: The borrower ponies up a down payment of between 10% and 20% of the loan amount, the first mortgage lender (generally a bank) puts up about 50% and the SBA picks up the remainder. The SBA contribution is funded through the sale of private sector debentures guaranteed by the agency. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases).
• Micro-loans. If you're scratching for cash, this is for you. Under the program, which since 1993 has doled out more than $100 million, small businesses can borrow up to $35,000 from nonprofit organizations that in turn borrow the funds from the SBA, whom they're obliged to repay. The smallest recorded loan was for $100, which went to buy a sewing machine for a budding seamstress. As part of the program, the SBA also gives grants to nonprofit outfits that help small businesses find and qualify for loans.
That does it for your borrowing options, but there are still investment routes you can explore, where you receive cash in exchange for a piece of the action. In other words, the SBA becomes a part-owner in your business.
• SBICs. Small-business investment corporations are venture capital firms that receive supplemental funds from the SBA if they're willing to live by SBA rules. There are some 400 of them in the U.S. possessing more than $20 billion in combined lending resources. They go after a smaller market, making investments in the $1 million to $5 million range, compared with $25 million to $50 million for more traditional VCs. Typically, SBIC money is exchanged for equity, debt (in the form of warrants or options) or royalties (a certain percentage of the firms profits).
• ACE-Net. For a fee of $450, small businesses can put their plans and funding requirements on a network accessed by hundreds of angel investors around the country.