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SBA Loans Simplified: 5 Ways to Finance Your Small Business

FinanceLegacy

Once you have made the decision to start your own company and developed a business plan, you will need funding to finance your dream. Among the most common questions I am asked is, "What type of business loan should I get?"

When considering financing options for your small business, it's important to understand your financing needs and the types of funding options available both when you start and later when you are ready to expand.  Some people are fortunate to be able to get financial backing from family members -- often at little or no interest.  Most of us are not in that situation, which also can be fraught with personal complications.

Sweat Equity Has Its Limits

Entrepreneurs frequently fund their startup businesses by "putting in their life savings and maxing out their personal credit cards."  While this method conveys a sense of independence and makes for great anecdotes in interviews, it's not the advisable source of financing.  Credit cards have higher interest rates (often between 16-20 percent APR), which means that the funding costs a lot more than it should.

Sweat equity and personal investment demonstrate personal investment to the pursuit of your business dream, but if there are a lot of initial bumps in the startup road, you can quickly lose your life savings and have no fall-back for the future.  It is hard to get a business loan or line of credit if you need one in the future if the bank determines that you have no personal cash on hand.

Using a home equity line of credit is another popular option.  These can be relatively easy to secure, but they can negatively impact your personal credit rating.  Additionally, if your startup costs are $750,000 but your house is only worth $400,000, you cannot get enough funding from this method.

SBA Loans: Options for Every Small Business

Fortunately, the Small Business Administration (SBA) has a number of loan programs designed specifically for small businesses, including Microloans, the popular SBA 7(a) Loans, the CDC/504 Loan Program, and Disaster Loans, which many businesses are now eligible to receive in the wake of Hurricane Irene and other natural disasters.

     
  • SBA Microloans provide short-term loans of up to $50,000 to small businesses and some not-for-profit organizations. 
  • SBA 7(a) Loans (up to $150,000) are available to establish a new company or to assist in the acquisition, operation, or expansion of an existing business.  The 7(a) lending program also has special funding options for small businesses that export to foreign countries or that operate in rural areas. 
  • SBA Express and Pilot Loans are offered to active duty military personnel, veterans, and borrowers from distressed communities. 
  • SBA's CDC/504 Lending Program is a long-term financing tool, designed to encourage economic development within a community.  It provides maximum funding up to $1.5 when meeting the job creation criteria or a community development goal and is used for fixed asset projects, such as purchase of land (including existing buildings), capital improvements (including parking lots and landscaping), modernizing, renovating or construction of new facilities, or the purchase of long-term machinery and equipment. 
  • SBA Disaster Loans, which many businesses hurt by Hurricane Irene can now apply for, are available through the agency's Office of Disaster Assistance (ODA).  Through this program, the SBA provides low-interest, long-term loans for physical and economic damage caused by a declared disaster.  SBA offers business physical disaster loans, and economic injury disaster loans.

Small business is America's most powerful engine of opportunity and economic growth. I n addition to loan programs, the SBA offers a variety of support services to help entrepreneurs navigate startup issues and find smooth sailing after they have opened for business.  The agency's 8(a) Business Development helps small and disadvantaged businesses compete in the marketplace and enables them to gain access to federal and private procurement markets.

Additionally, the SBA offers mentoring, procurement assistance, business counseling, training, financial assistance, surety bonding, and other management and technical assistance for women, minorities, Native Americans and veterans.  The agency is a valuable government resource for any small business owner.

A frequently quoted expert on small business lending, Rohit Arora is co-founder and CEO of Biz2Credit (www.biz2credit.com), which connects small business owners with 400 lenders, credit rating agencies and service providers via its safe online platform. Since 2007, Biz2Credit has secured $400 million in funding for more than 6,000 small businesses across the United States.