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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz. For more biz answers go to Coffee Talk Answers.

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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

SBA Loans

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 doesn’t 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 SBA’s 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. Don’t 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, it’s the leverage to help your bank make the decision to make the loan.

A Quick Review of the "How to Get a Loan" Menu
  • Initiate and foster a solid relationship with an SBA-approved lending bank (This is the most important to-do) .

  • Develop a good relationship with "your" loan officer and let this person know quite clearly that you want him or her to help you with the "loan committee." Yes, the "committee" is involved in almost every type of SBA loan with the possible exception of micro-enterprise loans.

  • Have a clear understanding of what the goals are of everyone involved. Obviously, your goal is to get the money. Well, guess what? The bank's goal is to get your money. In theory, they want to make the loan each and every time. In practice, they only make loans to those they feel will keep their loan principle secure and pay the interest on the loan (their profit).
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 SBA’s 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. That’s leverage!

The SBA doesn’t 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 I’m 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. Here’s 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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About the Expert

Kent Capener
Owner of Capener Consulting

Kent Capener

Kent is an expert on marketing; advertising; print, radio, and TV production; biz plan writing; trade show services; and direct response television. He relishes helping start-ups grow. more