If your company needs a cash infusion and you’re not able to obtain reasonable financing on your own, the U.S. Small Business Administration may be able to help.
The government agency assists small businesses by guaranteeing loans from lenders that meet SBA guidelines. This guarantee — which covers a portion of each loan — lowers the risk for banks, community development organizations and micro-lending groups that fund small businesses. That lowered risk, in turn, may make it easier to get a loan for your new or existing venture.
Be aware that you’ll need to supply your SBA lender with information on your business and personal financial history. Lenders, unsurprisingly, are looking for good character and ability to repay, but the SBA and other organizations can guide you in preparing your loan application.
About the SBA’s 7(a) Loan Program
The SBA’s most common financing program is the 7(a) Loan Program, which helps for-profit U.S. small businesses who have demonstrated a need for the funds, have tapped other financial resources before seeking federal aid, and meet other eligibility requirements. Under this program, your business may use its loan proceeds for working capital to fund operating expenses like buying supplies, machinery, furniture, fixtures or real estate. Among other purposes, the money can also be used for construction or renovation, or to set up or help acquire a company.
The SBA website details the ways businesses may and may not use these loans, and recommends checking with an SBA-sanctioned lender if you’re unsure. The agency has an online search tool to help you find approved lenders.
The maximum loan amount is $5 million, while the average was $337,730 in 2012, according to the SBA. Interest rates on 7(a) loans may be variable or fixed, and fees depend on the loan maturity and guaranteed dollar amount — with essentially no fee for loans of less than $150,000.
BBVA Compass notes that SBA loans carry longer terms than most conventional loans and have lower equity and less restrictive collateral requirements.
Types of Small Business Loans and Microloans
Special, quick-turnaround loans under the SBA Express program, which generally follow 7(a)-loan guidelines, are available at a maximum of $350,000, with up to a 50 percent SBA guarantee.
The SBA also offers microloans of up to $50,000 for the startup or expansion of small businesses and nonprofit childcare centers. Average loan size? About $13,000. Nonprofit, community-based lenders provide these microloans, and recipients may have to meet certain training or planning prerequisites.
Special SBA-backed real estate and equipment loans — the CDC/504 Loan Program— also are available, and so are export loans and low-interest disaster loans to help businesses get back up after a catastrophe like Hurricane Sandy, or to meet expenses when the military deploys key employees.
Small Business Paperwork, Applications, and Forms
If you think an SBA loan is right for your small business, get your paperwork and relevant data in order. The agency provides a checklist of forms — with links to relevant documents — that the lender will need before you can submit your 7(a) loan package to the SBA.
These include the SBA loan application, personal background and financial statements, business financial statements, ownership affiliations, business license and certificate, income tax returns, resumés, business overview, and similar information and sale terms for any business you may be acquiring. Every SBA loan program has its own conditions, so you’ll need to check with the agency — either online or at a regional office — for the particulars you’ll need to apply for your financing.
There are also alternatives to the SBA, like your local SCORE office, or the Small Business Development Center in your community. The SBA notes, though, that the documentation required for the various loan programs is similar.
Increase Your Chances of an SBA Loan
“Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis,” the SBA says. Applicants usually have to provide cash flow projections for a year or more, as well as personal and business credit histories. Lenders will also examine your cash flow and will notice if your business doesn’t pay debts on time.
The SBA suggests you’ll stand a better chance of approval by providing a solid business plan, and if you have assets you can use to cover any future cash-flow shortfall. SBA loans generally require adequate collateral, but the agency says it usually won’t reject an application if inadequate collateral is the only problem. Key owners and managers must also provide personal guaranties for SBA loans.
The SBA also suggests to do your legwork from the outset. They recommend trying lenders with whom you’ve already have a business relationship, and different institutions you explore may offer different types of SBA loans.
BBVA Compass is an SBA “National Preferred Lender” that employs an SBA lending group focused on helping the bank’s small-business customers obtain these government-guaranteed loans.