Lately I have received many questions about financing either a start-up or early stage business. Invariably entrepreneurs want to know about the Small Business Administration's loan programs. In the next several columns I will explore the various programs, resources and requirements available from the Small Business Administration (SBA). A link to the SBA Web site is listed in Links Section.
There is a very helpful section on the SBA Web site that summarizes the most frequently asked questions (FAQ). The SBA has kindly allowed me to re-print the questions relating to financing in today's column.
1. How do I apply for a SBA Loan Guarantee?
SBA has three different loan programs. Each of the programs is designed to cover a variety of business, needs, thus providing the most options to small businesses. (More on SBA's Loan Programs: http://www.sba.gov/financing/sbaloan/snapshot.html ) As the programs are delivered by SBA's partners and are not direct loans from SBA, businesses should consult their District offices or contact the lending partners in their area before filling out any applications. Contact a local lender and discuss your loan proposal with one of their loan officers. Be prepared to discuss your proposal in detail with the lender. You should have the following available for the lenders review: your business plan; your personal financial statements; your business financial statements (if already a business); collateral available to secure the loan; assumptions used in your projected earnings statements; management resumes of those involved in operating the business; and pro-forma balance sheets showing what the business would look like if the loan were granted. Be prepared to discuss your proposal in detail with the lender.
2. What do I need to qualify for a SBA Loan?
In order to get a 7(a) loan, the applicant must first be eligible. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans. For more information, see:http://www.sba.gov/financing/sbaloan/7a.html
3. What type of collateral do I need for a loan?
Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral and owner's equity contribution are also important considerations. All owners of twenty percent (20%) or more of the business are required to personally guarantee the SBA loan. The SBA does not deny approval for a SBA guaranty loan solely due to lack of collateral; however, it can be used as a reason, in addition to other credit factors.
4. How does the SBA guarantee loan program work?
Under the guaranty concept, commercial lenders make and administer the loans. The business applies to a lender for their financing. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty which SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for its loss, up to the percentage of SBA's guaranty. Under this program, the borrower remains obligated for the full amount due.
5. Where do I obtain an application for a SBA loan?
Applications have been provided by SBA to all lenders that actively participate with us. Applications can be obtained from the lender you will be working with, or at your local SBA Office. Many forms are also available online at www.sba.gov/library/forms. However, since there are several variations of SBA's loan programs, a business should always check with the lender or SBA District Office before filling out an application. See also: http://www.sba.gov/financing/basics/applyloan.html
6. What is the interest rate on SBA loans?
SBA does not set the interest rate on the loans, only the maximum rate the bank may charge. The actual rate is negotiated between the lender and the borrower. For more information on SBA's interest rates, please see: http://www.sba.gov/financing/subfiles/7a_interest_rates.html
7. How do I get a small business grant?
At this time, Congress has not set aside any monies for grants to start and/or expand a small business. The U.S. Government does have grants that meet other purposes not related to business needs. The following website contains some of those resources: http://www.sba.gov/financing/basics/grants.html
SBA does however provide a loan guaranty program for loans made by your local lender. The SBA guarantees loans that the lender could not normally approve. For information on this program and ALL of SBA's financial assistance, please go to http://www.sba.gov/financing/sbaloan/7a.html .
8. How long do I have to repay a SBA loan?
The repayment term is generally between five and twenty-five years depending on the life of the assets being financed and the cash needs of the business. Working capital loans (inventory and accounts receivable) should be repaid in five to ten years. The SBA also has short-term loan guarantee programs. Ask your lender or call your local SBA office.
9. What if the lender declines me for a SBA Guaranteed loan?
SBA no longer has direct funds to lend and cannot provide financial assistance without a participating lender. Ask the lender what can be done to improve your business plan and application. Correct the business plan and resubmit it to the lender. If that lender is unwilling to approve the loan or submit the application to SBA, try another lender. The Small Business Development Centers (SBDC) and the Service Corp of Retired Executives (SCORE) can provide assistance. SCORE and SBDC are partly funded by SBA and one-on-one counseling is available.
10. What types of Businesses are Eligible for SBA Loan Programs?
The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance. For more information, see: http://www.sba.gov/financing/subfiles/type_of_business.html