Small Business Administration
Any small business owner should have a good understanding of the operations of the SBA
– the SBA is one of the smallest branches of the federal government. However, it is vitally important in financing small business ventures. There are about 14+ million businesses that are eligible for SBA assistance. It is true that most small businesses start with a capital of less than $50,000 and that this is funded through savings, family & relatives, friends or as new ventures branching off from existing businesses. Unfortunately only a few businesses get SBA loans. Most SBA loans are for on-going expansions not for start-ups. (Don’t let this discourage you from asking the SBA directly)
Of the small businesses that have no other recourse but long term loans the SBA finances 35 percent. The remainder is serviced by many other groups. In other words the SBA is far and away THE largest single source of long term business loans.
We will give you an overview of the services offered by the SBA, you can ask for and get help directly help from the SBA free of charge.
It is interesting to note that small businesses make up half of the US economy and many more firms start up every year. SBA financing is usually for the long term with the average loan being for $100,000 and for seven to ten years. Most of these loans are made by the bank at normal interest rates with the SBA providing a guarantee for 90% of the total loan amount. To be eligible you must be of good character, a small business, operate for profit and show good repayment ability.
Banks usually ask you to provide about 25% to 50% of the total funds needed, with the bank lending you the rest. There are many common misconceptions about the SBA: that it is only for the minorities, that it provides very low interest, direct loans, that it serves only a percent or two of businesses and it offers few other services other than lending – all of these are untrue.
The SBA likes to tell us how it fits into the US economy. About 93% of all businesses are small businesses. Small businesses employ more than half the total US work force and provides about 70% of all new innovations and new jobs. Over half a million of the companies start each year. A survey in “USA Today” indicates that about 40 percent of the US adult population has a private dream of starting their own businesses.
In the last few years more women than men opened businesses. These were mostly in the service industry. The SBA has provided loans to 10% of all companies in the US that is $40 billion in loan guarantees. In some towns every businesses in the main street or in the shopping mall has received some kind of SBA help.
Each year the SBA guarantees 50,000 separate loans. And each year the SBA trains or counsels about 500,000 people. This means that for each loan made ten people are counseled.
In some states 30 percent of the businesses get SBA help every month. Much of this help is provided by SBA management information. About 90% of the people service the SBA are volunteers who work without pay. About fifteen thousand business school graduates and similar number of senior business managers volunteer – few other government agencies can boast these numbers.
In thousands of cases major US businesses would not be in existence without SBA help. Remember that with or without an SBA loan every giant corporation initially started out as a small business.
- Where do I get the money?
A bank that the SBA approves provides the loan the SBA guarantees it.
- What are my chances of getting a loan?
That depends on your qualifications and the quality of your application. During some months the SBA approves more than 50% of the applications sent by the bank.
- What are the types of SBA loans?
The SBA has about one hundred offices across the country and it is best known for the direct loans that is given at low interest rates. This was a major program at one time but no more – now all SBA loans are guaranteed bank loans. For example, if your business needs to get a long term loan of $100,000 you might go to your local bank. If they will make the loan you don’t need the SBA – but suppose they say that they need someone to guarantee the loan just in case you don’t repay the loan – then the SBA might be the ideal guarantor to help you get the loan
- What are the loan making mechanics?
The bank has SBA applications or can get them quickly. You are supposed to fill it out, most bankers will help you or you can use your accountant. Or for a fee there are services that will do this for you. When your application is completed the bank will send it to the SBA.
- What should be included in the application?
The full details are available from the SBA website
- How soon will I have a decision?
On a properly completed loan application the bank is informed by the SBA within the period of ten days. Most of the delays are caused by incomplete or applications with errors.
- Who is eligible?
Generally any for-profit US company that is classified as a small business. The agency almost never makes bail out loans for a bankrupt business. You need not be turned down by a bank to become eligible, although it is wise to check out several banks to find the best arrangement.
- How is “small business” defined?
There are numerous size standards but as a rule of thumb, companies with under 500 employees and under $2 million in annual sales are considered small. If you are under these limits you will probably considered small.
- How does the SBA decide? What is the criteria?
The loan applicant must be: for profit, small, of good character, not bankrupt, able to manage the business, able to repay the loan and able to put other funds into the business. The SBA will rarely provide 100% of the financing, except where the applicant has already made a significant investment such as a new school graduate.
- How much will you be able to borrow? How much will you be asked to put down?
The SBA can guarantee up to 90% of a loan of $750,000. Average loan amount is about $100,000. There is no fixed portion that the SBA expects you to supply to the business. Usually this varies between one-fourth to one-half of the total capital required by the business. This means that if the total capital required by the business is $200,000 the SBA will require you to supply $100,000.
- Are SBA loans low interest?
A few SBA loans are low interest but most are not. The interest rate is set by the bank as these are close to the market interest rates. The special low interest direct SBA loans are for businesses that have suffered disaster damage.
- How soon must I pay off the loan?
The term run usually from seven to twenty years.
- What about collateral?
Banks as a rule are interested on collateral as a means of quick source of loan settlement in case of insolvency. But the SBA is mainly interested in loan repayment ability.
- How does the SBA protect the bank?
The SBA provides the bank with a guarantee to up to 90% of the loan amount. This means that if you take a loan for $100,000 and default on payment the SBA will have to make good $90,000. The loss suffered by the bank might differ if the business has high liquidation value as this might cover part of the loan amount.
- Why does helping the bank serve you, the borrower?
Because offering such security to the bank means that they will be more willing to advance. Without the SBA guarantee the small business would be unlikely to receive bank loans.
- Do I really need to repay an SBA loan?
You are definitely expected to repay the loan. If you are unable to do so intensive management counseling is available and new term of repayment can be arranged. If you still are unable to repay the loan the bank will ask the SBA to make good on the bank guarantee. It may become necessary to sell the collateral and result bankruptcy and litigation.