Obtaining an Small Business Administration Loan

A challenging economic climate need not deter you from pursuing your dream of opening a small business or carrying through on plans to expand an existing venture. Banks, venture capitalists, peer-to-peer lenders and credit cards are among the potential sources of funding available to entrepreneurs. Additionally, many states offer business grants that can help owners realize their ambitions.

Many owners have successfully obtained funding via the U.S. Small Business Administration. Although the SBA does not provide business grants, it does operate a program aimed at getting capital into the hands of the owners of creditworthy small firms.

How does an SBA loan work?

SBA loans can help both start-ups and existing small businesses that are struggling to get a loan through ordinary lending channels. Both short and long-term financing is available.

Basically, the SBA works with collaborating financial institutions to guarantee loans given out to small business owners. The SBA does not make loans directly to small firms, but it guarantees up to 85 percent of the amount of the loan made by the bank.

What loans are available through the SBA?

7(a) Loan Guaranty Program. Businesses can obtain up to $2 million through this program, which is the most commonly used at the SBA. Owners apply directly to a private lender for an SBA 7(a) loan. They must demonstrate they meet size standards, are for-profit, do not have internal financing resources and will be able to repay the loan.

Certified Development Company - a 504 Loan Program. Companies looking to buy real estate, equipment or machinery can select this option, which provides long-term, fixed-rate financing. The aim of this loan is to help owners expand or modernize their operations while avoiding large down payments and variable interest-rate loans.

The 504 program usually involves a loan secured with a senior lien from a private-sector lender, a loan secured from a Certified Development Company (a private nonprofit organization devoted to regional economic development), and a contribution of at least 10 percent equity from the business applying.

Microloan Program. This option offers up to $35,000 to newly established or growing small businesses. To obtain one of these loans, business owners approach a local community-based lender which makes a credit decision based on their own criteria. If you qualify, the SBA will make funds (either loans or grants) available to the intermediary, who then administers the loan.

Disaster Recovery Loans. Firms that are hit by a natural disaster such as an earthquake or flood may be able to obtain a loan from the SBA to help aid recovery.

Other loans. The SBA website has a list of additional loan programs available, including one aimed at helping veterans start businesses and another to assist export businesses, employee trusts and various particular borrower circumstances.

How do I qualify?

Firms that would like to apply for an SBA loan have to provide the same type of evidence that would be required by a bank - and the lender has to accept this verification in order for the administration to guarantee the loan.

In some cases, however, a borrower who is asking for $25,000 or less may be considered to prequalify for a guarantee based on character, credit, reliability and experience.

Expect to supply the following documentation when applying:

Business description. This document lays out the type of business you operate, including sales figures, employee data, how long you have been in business and who owns it.

Loan request. This describes how you plan to use the funding, including purpose, amount sought and the type of loan needed.

Collateral. What collateral do you plan to use the secure the loan? Examples include equity in the business, available cash and borrowed funds.

Business financial statements. Prepare financial statements from the previous three years, as well as current interim statements.

Personal financial statements. These are statements of any owners, partners, officers and stockholders who control at least 20 percent of the business.

The SBA says that strong and accurate financial statements are the key element for loan approval. These include balance sheets, income statements, cash flow projections, accounts receivable and payable, and personal financial statements from all business partners.

In conclusion

Many entrepreneurs have found SBA loans to be just the lifeline they need to expand on current success or take their business in a new direction. Remember that any roadblocks along the way to reaching your goals do not have to be permanent. The SBA is just one resource at your disposal as you search for loans, business grants, and other methods of funding your firm.