Featured Biz Question
My two partners and I are in the process of purchasing an existing restaurant in the S. Florida area. We are in the process of finalizing our business plan. My question involves start up capital. We have managed to raise a portion of this through our personal savings, family and friends. This leaves us short of our needed amount. We are considering angel investors or a bank loan through the SBA. Does anyone know what collateral/guarantees SBA loans require. Are there organizations I can forward our business plan for consideration? I appreciate any ideas you may provide.
Answer from our Guest Expert Kent Capener of Capener Consulting
The SBA can be a valuable ally to any business seeking capital. Your question of what's required for collateral is one that perplexes many and leads to a major misconception by quite a few. That misconception is that the SBA requires a down payment for a loan. They do not.
What the SBA Really Does for Your Small Biz
So how do we misconceive? Generally, it's because the SBA doesnt offer interest guarantees for
100% of any loan. (Note: interest guarantees are what the SBA really does they do not make direct
loans.) Some caveats also lead to some SBA misconceptions. For example, while several direct loan programs
are in effect in the SBAs operating procedures, Congress hasn't funded them for many years. With
no money appropriated, the programs are just space on the pages they occupy meaningless. The
last funded direct program was for female Vietnam veterans of minority birth. Dont confuse the
farm loan programs that the SBA administers with direct loans. Even though they are direct, the SBA
administers, it does not lend the money.
So how does the SBA really help in the fast food environment of small business loans? In reality, its
the leverage to help your bank make the decision to make the loan.
A Quick Review of the "How to Get a Loan" Menu
What Are the SBA's Goals?
Paraphrasing from the originating SBA charter, it states the overall goals of the SBA are to support the small business community in the United States. The SBAs goals are help you get the money by offering a guarantee to the bank (your lender) of at least a portion of the interest on your loan.
What leverage does that apply to the bank?
If your business goes south in a northbound hurricane, which is possible with any business, with an
SBA loan, the bank will receive a check from the United States Treasury for the interest remaining unpaid
that the SBA guaranteed to your bank. In other words, the bank will get a portion of its profit from
the government if you default on your loan. Thats leverage!
The SBA doesnt guarantee any portion of the principle, however, and they do have requirements
for the validity of the loan package, without their guarantees. The process is that once your bank has
made a decision, it will send the package to the SBA for review. If the SBA approves, the SBA will notify
the bank that they will participate with a guarantee of ____% of the interest on the loan. If you're
thinking that Im about to say that the process is just like applying for a commercial (non-SBA)
loan , I am, because it is.
The most you should expect the SBA to guarantee is 80% of the interest; however, 70% is more common. It's coincidental that most banks would look to sources other than their money in funding a like amount of capital need of the business. For example, if your total need is $500k, the bank and the SBA would look for you to have other sources for at least 20% or $100k. Heres the rub that makes most drop out of the system you must prepare in advance to collateralize the amount you are borrowing --- just like any other bank loan. continued
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