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SBA: Small Business Administration Loans

1. What's an SBA loan?

2. Who's it good for?

3. When is this the best choice for me?

4. When is this not advised?

5. Tips for getting the money.

6. Ingredients you'll need on hand.

7. Idea Cafe Tips.

8. Watch out for!

9. Web Links.

10. Resource.

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1. What is an SBA loan?

The Small Business Administration is a United States federal agency that aims to assist small businesses with advice, financing, and other business development aid. The SBA itself does not make loans, but guarantees loans that you apply for and receive from a bank or finance company. "People think we tap directly into the U.S. Treasury," says one SBA official. "We don't."

The SBA has a number of different loan programs. The SBA's 7(a) Loan Guaranty program is the agency's main lending program. It guarantees loans made by commercial banks to small businesses. Banks fall back on SBA guarantees when the loan applicant is just slightly too risky for them under their standard criteria, so you'll have to get approval from both the bank and SBA before you get your money. The SBA doesn't guarantee the entire loan; in most cases it will back up to 85 percent of loans up to $150,000 and 75 percent of loans of $150,000 to $1 million. SBA 7(a) loans can be used for most common small business needs; working capital, equipment, real estate, purchase of existing businesses, and debt refinancing.

In the last couple of years, the SBA also established the MicroLoan program for loans up to $30,000 for up to six years. These loans are handled by community economic development groups selected by the SBA and interest rates vary. It's specifically designed to help brand-new businesses get off the ground. This is what you can use to buy that computer, printer, get the extra phone lines in, and acquire the materials you need to launch your business.

SBA's 504 Loan Program can only be used to finance the purchase of commercial real estate for businesses that are likely to preserve or increase the number of jobs. Qualified small businesses typically finance 80-90% of the real estate, with much of the financing coming in the form of a fixed-rate loan.

Another SBA option is an SBAExpress loan, formerly the "Fastrak" loan. These are only available through SBA Preferred Lenders. The SBA lets these banks use their own forms and loan approval procedures for loans up to $150,000 and guarantees an SBA response within 36 hours. SBA guarantees the loans up to 50 percent.

The SBA also has loan programs for women and minorities in selected areas. Check also for SBA programs that help US companies to expand their export activities.

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2. Who is this good for?

Existing businesses that come close to qualifying for a traditional bank loan. Remember that the SBA is interested in helping existing businesses get bigger. You'll have to have something already started before they'll line up behind you. The SBA funds only a few start-ups through their 7(a) loan program, and those are very difficult to obtain.

Companies and individuals with money to contribute towards their own business; the SBA generally expects you to contribute 20-30% of the money you need for your business.

Companies with a growing workforce that want to buy commercial real estate may like the flavor of SBA's 504 program.

New businesses -- for the MicroLoan program only. Typically, microloans of all sorts (some are funded by entities other than the SBA) are available through local economic development centers; the money itself comes from local banks. And remember, they're considered primarily a stepping stone to more traditional financing. Use your microloan to establish a track record that'll impress outside investors, traditional bankers and maybe even your dad.

Extensions of a successful franchise or new businesses with strong experience in the type of business that's being started. If the borrowers have ample cash to invest (like one-third of the total needed), an SBA 7(a) loan may be a possibility.

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3. When is this the best choice for me?

If your business is already on a roll, the guarantee can help you get financing to expand your operation, buy equipment, boost working capital, and buy real estate. On the other hand, you must pledge personal assets to secure the loan.

When you have a clear plan for your business; both a bank and a community economic development group will expect a business plan as well as all loan documents.

When you are in a position to contribute financially toward your business and give guarantees for the portion of the loan not guaranteed by the SBA.

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4. When is this not advised?

When you have a very bad credit history. There will be a credit check, and although these loans are to help those who might not be able to qualify for traditional loans, you have to be credit-worthy.

When you have no assets whatsoever to contribute to your business. Better then to check with friends, family, or other sources.

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5. Tips for getting the money

Use the SBA's own Small Business Development Centers, which offer business planning and financing assistance, primarily at no cost. They'll be able to help you identify SBA loan programs that are appropriate for your situation, identify banks or community development programs that handle such programs, and help you make sense of the loan process. These SBDCs are often located on local community college campuses. You can also contact your nearest SBA office. Contact your SBA office or the National Association of Government Guaranteed Lenders to find banks that are experienced SBA lenders; they'll understand the process much better than banks that handle SBA loans less frequently.

It used to be very difficult to get SBA loans under $150,000 because banks were required to go through all the same paperwork as for bigger loans, and they couldn't handle such loans profitably. But the SBA instituted a "Low Documentation" or "Low Doc" program for some loans under $150,000. Ask about these to reduce paperwork and increase the chance the bank will be willing to consider your loan request.

An SBAExpress loan is even more streamlined than a Low Doc, if you work with a bank that handles it.

If you are in a start-up business and applying for a MicroLoan, showcase any experience you may have in the field in which you want to own a business. Your proven ability to perform can help assuage lenders' concerns.

Be certain to ask about any programs for women, minorities, or exporters (if you qualify).

6. Ingredients you'll need on hand

Basic financial package. SBA's officials say that cash flow projections and the useful life of assets are the most crucial factors in a loan application. Bankers can estimate the useful life of prosaic equipment like computers, but for anything unusual, you may have to get a professional appraisal.

The SBA requests that you put up personal property, such as your house, if you have very few business assets or if your application is marginal.

For microloan startups or someone buying an existing business, the SBA wants to see owner equity of at least 10 percent. For bigger loans, they usually require owner equity of at least 30 percent.

For women or minority-owned businesses, you'll need proof of the ownership of the company.

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7. Idea Cafe Tips

The SBA is a dynamic agency that is always coming up with new programs and getting more efficient, so even now they may be offering new possibilities we haven't heard about to report. So keep abreast of what they're up to -- there may be just the solution for your business -- whether for financing or other biz help.

If your business meets the criteria for regular bank loans, go that route, since you'll be establishing the kind of long term relationships both you and the bank will want to stick with.

If your business is primarily owned by women and/or minorities, the SBA can probably give you the foot up that you couldn't get from regular lenders, especially in the start-up years of your business.

8. Watch out for!

Outside "consultants" who say they'll grease the way, for a fee. You'll have just as much clout on your own.

Alphabet soup. With 7(a), SBAExpress, MicroLoans, 504, and Low-Doc (which require only a single-page application form and average a three-day turnaround) only some of the options, it's easy to get lost. Keep talking with SBA folks 'till you find one who truly understands your situation and the program that's right for you. Otherwise, you might find yourself getting turned down for one program (and wasting a lot of time), when you'd qualify for another one.

Banks that are inexperienced with the SBA process. They can take a longer time and are more likely to be hesitant about granting the loan.

Don't expect an SBA-guaranteed loan to bail you out of a shaky situation. There's a lot of pressure on the agency and banks to make sound loans.

Delays. Because most of the financing options are handled through local banks, you might have to wait for two sets of approvals before getting the loan.

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9. Web Links

The SBA's site replete with small business resources and guidance for applying for SBA-backed loans.

10. Resource

National Association of Government Guaranteed Lenders
P.O. Box 332
Stillwater, OK
405-377-4022

 

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