Small Business Administration – SBA – is the US agency that administers US government small business loan and grant programs. SBA does not disburse the loans. Instead, it guarantees the loans to small business borrowers. It is private banks and other lenders who actually provide small business loans.
Small business entrepreneurs approach a local lender approved by SBA. The lender reviews the loan proposal and decides whether to:
- Grant the loan immediately, or
- Seek SBA guaranty that the government will pay the lender if the borrower defaults.
The first option is selected if the bank determines that the business proposal is sound and the risks of non-repayment are minimal. It is the risky proposals, particularly from new entrepreneurs, that the SBA is usually called upon to guarantee.
In its turn, SBA carries out its own review of the loan proposal to check that it meets its criteria. If satisfied, SBA would provide the necessary guarantee.
Government small business loans are thus actually guarantees to ensure that deserving entrepreneurs receive funding even if the business proposal is somewhat risky.
Government Small Business Loan Programs
To meet different needs and suit different types of borrowers, SBA has devised different small business loan programs. We take a broad look at these programs below. For fuller details, meet the counselor at your nearest SBA office.
- 7(a) Loan Guaranty Program is the primary loan program to help small businesses. These businesses might find it difficult to get loans on normal terms. Loans for different business needs such as land and building, leasehold improvements, machinery and equipment, furniture and fixtures, working capital and debt refinancing could be availed under this program. Working capital loans can be for 10 years and fixed capital loans for 25 years.
- 504 loan programs seek to bring jobs and businesses to areas that need them. Loans are typically extended jointly by private sector lenders and SBA funded Certified Development Companies. These long term loans could finance up to 90 per cent of real estate or machinery or equipment.
- 7(m) Microloan programs up to $35,000 are short term loans intended to finance inventory, supplies, furniture & fixtures, machinery & equipment. These loans are extended through intermediaries who provide management and technical assistance, as well as finance, to the borrowers.
SBA also offers a loan prequalification service by analyzing small business loan applications. The analysis would involve assessing key financial ratios, credit and business history of the borrower, and the loan-request terms.
For a more detailed look at SBA assistance, you could log on to Startup Guide SBA Asssistance page.
SBA Certification of Small Business Lenders
SBA reviews the portfolio of loan guarantees of all the lenders. Depending on their record, well-performing lenders are designated as ‘Certified’ or ‘Preferred’. SBA approvals are speedier if you approach one of these certified or preferred lenders.
To see a list of certified and preferred lenders in your state, go to SBA’s list of lenders page.
Small Business Investment Company Program
SBA licenses and regulates Small Business Investment Companies – SBICs – that make investment or loan capital available to small businesses. SBICs support good business proposals from entrepreneurs who cannot bring sufficient capital of their own.
SBICs are venture capitalists who receive government small business loans to support promising small businesses – startups or existing ones. If you wish to explore this avenue, log on to http://www.sba.gov/INV/forentre.html.
Special Assistance Programs
SBA also has programs for
- Disaster asssistance to non-agricultural victims for funding long-range recovery from disasters
- Small Disadvantaged Business – SDB – assistance programs
- LowDoc loan programs with simpler documentation for startups
Contact nearest SBA office if you think you could qualify for such special assistance.
Evaluation Criteria for Loans
SBA evaluates government small business loan applicants using the following criteria:
- Character: Does this borrower’s credit and payment history indicate a sense of obligation to pay his or her debts?
- Does this borrower possess, or has access to, small business management expertise? Does the person appear committed to this business?
- Has sufficient funds been arranged to run the business on a sound financial basis?
- Has a feasible business model and operational plan been developed?
- Would the borrower bring adequate funds of his or her own into the business?
- Do the cash flow projections indicate an ability to make loan payments in time?
- Would the borrower bring sufficient collateral security for the loan?
Collateral security is usually provided in the following ways:
- Pledging business assets
- Executing personal guarantees
- Accepting liens on personal assets of the owners
While availability of collateral is welcomed, SBA won’t reject otherwise sound proposals for lack of collateral alone.
The Government Small Business Loan Proposal
The key element of your business proposal is your business plan. Read the article on Small Business Planning to learn how to convert your business idea into a detailed small business program.
The loan proposal should present you, your business plan and the financing plan in a favorable light. You do this by ensuring the authenticity of the contents through proper research, adopting a logical and readable presentation format and supporting the proposal with evidencing documents.
A sound format for your government small business loan request is outlined below:
- An overview of your business entity, the persons behind it and contact addresses. The overview then goes on to summarise the loan request – how much and why the money is required.
- Next describe your business in some detail – what it does to earn revenue and its present financial position. Who owns the business? How many employees are there? How long has it been in existence?
- Now come the information about the market opportunities and your marketing plan. Profile your customers and identify your competitors. Explain how you would compete in the market.
- Conclude with the backgrounds of the management team that would implement the business plan.
- Provide supporting documents – Past financial statements, financial projections, net worth statements of owners and details of any collateral that would be available for the loan.
- Review the information provided by you
- Examine the aspects mentioned under Evaluation Criteria above
- Look to see evidence of your understanding of the business and commitment to it
- Request a report on your credit history from a credit reporting agency
During discussions with prospective lenders, you should be able to present your business idea clearly. Prepare for the presentation by fully developing your business idea. Explain how you will compete in the market and earn a profit. Both marketing and financial aspects must be analyzed and practical strategies developed.