Congress created the Small Business Administration (SBA) in 1953 to assist entrepreneurs in creating successful small enterprises. There are SBA offices in each of the 50 states, as well as in the District of Columbia, the Virgin Islands, and Puerto Rico. Its primary goals are financing, training, and advocacy for small businesses. The SBA partners with thousands of lending, educational, and training institutions nationwide to meet these goals.
Contrary to popular thinking, the SBA is not a lending institution. It simply assists lending partners by guaranteeing major portions of loans made to small businesses when other funding or financing options are not available due to a variety of reasons.
SBA lending programs change, and program requirements are very broad in order to accommodate a wide range of financing needs. An exploration of the SBA Web site will provide the latest lending information and help you to define your requirements and needs analysis in more concrete terms.
The SBA partners with lending institutions. For example, when a small business applies to a bank or other financial institution for a loan, the lending officer reviews the application. It then decides if it merits a loan on its own. If yes, the loan is granted and no SBA involvement is needed.
If, however, the loan request can’t stand on its own or there’s too much risk for the bank to carry, it may require the additional support of an SBA guaranty. In this case, the lender requests SBA backing on the loan. The lending institution works directly with the SBA.
When the SBA guarantees the loan, it assures the bank that the government will reimburse the lending partner for a portion of its loss if the business defaults on the loan.
It’s important to note that the SBA guarantee doesn’t permit the lending institution to disregard standard commercial loan underwriting principals, such as collateral and personal guarantees. (In other words, a bad risk is still a bad risk.) However, it does allow the bank to loan more money, extend longer terms, and approve loans to startup or early growth businesses than it could otherwise. By financing these programs, the SBA helps businesses gain more access to capital in the long run, potentially creating jobs and expanding the tax base.
Typically, the SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. In most cases, the maximum guaranty is $1 million. There are some exceptions, and these figures can change.
If you’re considering a lending institution-SBA partnership for your financing needs, here are some guidelines to follow:
First, be prepared. Know your business, the intended market, your targeted customers, your potential niche, projected financials, and your competition. If you’ve planned your business thoroughly and strategically, you’re covered on the first part.
Allow your business plan to be the voice of your vision. Be sure to provide personal financial statements and tax returns for the business owners as well, as there’s little or no company history for the lending decision to be based on. Most important are financial statements that include monthly cash flow projections, which list critical assumptions.
Second, find the right lender. Not all banks are equal SBA partners. Local banks and other select commercial financial firms comprise the distribution system for SBA loans. Not every lender is the same nor does each one automatically fit your needs. Not all loan programs are available at all lending institutions.
Your financial institution should know your region (if your business is dependent on the local economy) and your business industry. Select a lender with an established track record, specifically with the SBA product that best matches your company’s current financial needs.
The SBA is there to help small business owners. Help yourself first by doing the appropriate research and by preparing thoroughly for your meeting with the SBA partner.
For the who, what, where, when, and how of the SBA and your small business, read Who Can Apply for an SBA Loan?, SBA Loan Key Requirements, Where to Get Help Before Applying for an SBA Loan, When to Apply for an SBA Loan, and How to Apply for an SBA Loan.