Where do you go when private financing sources don't lend you money? The answer is usually the SBA. Small businesses are encouraged by the federal government. SBA loans have less stringent requirements for owner's equity than do commercial loans, which makes the SBA an excellent financing source for startup companies. Many SBA loans are for smaller amounts than banks are willing to lend.
Shutterstock The SBA is not giving money away. The SBA does not make direct loans, but it does provide an SBA guaranteed loan to entrepreneurs, which the bank will pay back if you can't.
Banks can participate in the SBA program in a number of ways. Your small business loan package can be prepared by the SBA. The bank will submit your loan package to the SBA. Applications submitted by regular lenders are reviewed by the SBA in an average of two weeks, certified SBA lender applications are reviewed in three days, and approved through a preferred SBA lender is even quicker.
SBA loans only look at the ability to repay the loan from cash flow, but they also look at personal credit history, industry experience, or other evidence of management ability. If you own 20% or more of the business, the SBA requires you to personally guarantee the loan. You can't ask the government to support you if you don't want to. There are a lot of SBA loan programs for businesses at different stages of development. This is a closer look.
The loan program is called the Guaranty Loan program.
The 7(a) Loan Program is the most flexible of the SBA's loan programs.
The SBA gives maximum loan guarantees of up to $5 million or 75% of the total loan amount, whichever is less. The maximum guarantee for loans under $150,000 is 85%. Many of the usual fees are not allowed by the SBA. The agency charges the lender and allows the lender to pass on the fee to you.
An SBA 7a loan can be used for a lot of different things. It is possible to pay back the money over 25 years for real estate and equipment and 10 years for working capital. There are different interest rates for different types of loans.
The program is called SBA Express.
The 7(a) program offers several specialized loans, but a general 7(a) loan is best for your business. The SBA Express Program promises fast processing for amounts less than $350,000. SBAExpress can get you an answer quickly because approved SBAExpress lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan. Up to 50 percent of SBA Express loans are guaranteed by the SBA.
The CAP lines.
The SBA has a collection of revolving and nonrevolving lines of credit called CAP lines. A revolving loan is similar to a business credit card, with which you have a balance that can go up or down depending on the amount of money you borrow. Nonrevolving lines of credit allow you to take a flat amount and pay it off over time.
SBA CAPLines have loans that are guaranteed up to $2 million. Five loan and line-of-credit programs are part of the CAPLines umbrella.
This is the first thing. Businesses that face increases in inventory, accounts receivable, and labor costs can use a seasonal line of credit.
There are two The contract line of credit is used for labor and material costs.
There are three. Businesses unable to meet credit qualifications associated with long-term credit can use a standard asset based line of credit.
There are four. The small asset-based revolving line of credit has less strict requirements than the standard asset-based program.
There are five. Small general contractors and builders can use the builder's line of credit to finance labor and materials costs.
The five credit lines have maturities of up to five years, but can be tailored to the borrowers needs.
Microloan program
SBA financing is not limited to the group of loans. Small loans of up to $35,000 are available through the MicroLoan Program. The loans can be used for machinery and equipment, furniture and fixture, inventory, supplies, and working capital, but they can't be used to pay existing debts. The program is unique because it helps borrowers who don't meet traditional lending standards.
Microloans are administered by non profit organizations. The SBA gives loans to these organizations and then they give loans to entrepreneurs. Before a loan application is considered, small businesses may need to complete some business skills training.
Six years is the maximum term for MicroLoans.
The CDC has a loan program.
The SBA 504 Loan is on the opposite end of the loan size spectrum. Growth and expansion are the most common uses for loans.
Certified Development Companies are non profit organizations that work with the SBA, banks, and businesses looking for financing. Each region has a CDC that covers it.
Bring your business plan and financial statements to the CDC if you are looking for funds to buy or renovation a building. 50% of the package is financed by the bank, 40% by the CDC and 10% by the business.
The SBA expects small businesses to create or retain jobs in exchange for below-market, fixed-rate financing. Those businesses that meet the public policy goals are those that will contribute to a business district, such as an empowerment zone, or those that will contribute to rural development.
The hub zone program.
Forty states have established programs to designate enterprise zones, which offer tax breaks and other incentives to businesses that locate in certain economically disadvantaged areas. The number of zones, incentives offered, and success of the programs are all variables in states. Lower utility rates or low-interest financing may be available to businesses. Businesses can be eligible for incentives if they create new jobs in a community.
The H ubZone program provides tax incentives and stimulates community investment. Grants and tax breaks will be given to businesses in certain areas. Entrepreneurs in those areas can get federal tax breaks.
If you decide to locate in an empowerment zone, make sure to consider long-term concerns such as the availability of a workforce and the accessibility of your target market. The zone needs to offer other customer service support. Good highway access, a solid infrastructure, and a trainable labor force are some of the things that make a zone successful.
Contact your state's economic development department or HUD's Office of Community Renewal if you want to learn more about enterprise zones.
There is a business development program.
The SBA's 8(a) program is a small-business set- aside program that allows certified socially and economically disadvantaged companies to enter the federal procurement market. The 8(a) program is supposed to be a starting program for minority businesses.
The 7(a) Guarantee Loan and the Pre-Qualification Programs are available to entrepreneurs who participate in the 8(a) program. Businesses have to be owned by people who are poor. Race and ethnicity are included in the socially disadvantaged category. The person needs a net worth of less than $250,000 and two years' worth of tax returns to be economically disadvantaged.
There is a program for exporting working capital.
The Export Working Capital Program is a good place to start if you want to export. There is a 90 percent guarantee on loans greater than $2 million. Funds can be used for financing transactions. The exported goods must be labeled from the US.
There are special purpose loans.
It's possible that you have a special case that requires help. In many cases, the SBA has a loan program tailored to your situation, even if you think you deserve more financing. You may be eligible for a Pollution Control Loan if you plan to spend more money to reduce the toxins you are putting into the air, soil, or water. Any form of pollution, including recycling, must be prevented, reduced, or controlled by the facility.
The International Trade (IT) Loan Program is something you should look into if you want to be active in international trade. It is possible for the SBA to guarantee up to $1.75 million for fixed asset financing or for the same purpose as an existing loan. It is not possible to include working capital in an IT loan.
There are many variations of the SBA's general small business loans that can be used to support special needs. If you believe that your business is in a category in which the SBA can give you more loans, it's definitely worth a look.
The article is from the fifth edition of Start Your Own Business.
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