Financing your business with the SBA’s help

The SBA’s guaranty assures the lender that if the borrower does not repay the loan, the federal government will reimburse the lender, up to the percentage guaranteed by the SBA.

by Bruce Hodgman — 

Perhaps no activity in starting up a new business or in laying plans for growth of an existing business will have as much impact on your prospects for success over the long run as ensuring adequate financing.

How do you go about financing your enterprise? The U.S. Small Business Administration (SBA) recommends developing a proposal that includes a business plan. In addition, SBA recommends paying a visit to a commercial lender with whom you’ve done business in the past, a place where you are a known quantity, one that offers the loan products you need. If that lender will finance your proposal, you don’t need the help of the SBA.

But, if that lender declines because of risk or tells you that it can make the loan only if you can line up an additional guarantor, then the SBA’s 7(a) loan program may be the answer for you. If your lender does not offer the loan products or services to meet your business needs, visit the SBA Web site at www.sba.gov/az. Then, click the “Financing” link for a list of participating lenders; or call the local SBA office for advice about which lender may look favorably on your loan needs.

The 7(a) program is the most basic type of loan the SBA offers to small businesses. In fact, to be precise, it is not a loan per se, but a guaranty the SBA provides to participant lenders, thus making it easier for them to make small business loans they otherwise would not touch.

Under this concept, businesses apply to a commercial lender for a loan. The lender, using its own criteria, decides whether to make the loan on its own or whether the application has some weaknesses that would call for a SBA guaranty. Most often, the weakness is a problem with insufficient collateral or the inability to afford repayments for the shorter-term loans that lenders prefer. If the lender decides it would rather not take the risk alone, it turns to an SBA 7(a) loan guaranty.

The SBA’s guaranty assures the lender that if the borrower does not repay the loan, the federal government will reimburse the lender, up to the percentage guaranteed by the SBA.

All businesses that are considered for financing under SBA’s 7(a) loan program must meet SBA size standards, be for-profit and able to show sufficient cash flow to meet their monthly obligations, plus a monthly loan payment.

Remember, the SBA guarantees the loan, but the borrowers are obligated for the full amount due. Also, borrowers must be of good character and be able to provide reasonable collateral and owner participation (equity investment).

Most small businesses do not need a whole lot of money to start or to expand, but they do need good repayment conditions; namely, longer terms and low interest rates. The 7(a) loan program provides both.

The 7(a) loan program has a maximum loan amount of $2 million with a guaranty of 75 percent, or $1.5 million. The lower the amount needed, the higher the guaranty can go, up to 85 percent on loans of $150,000 or less.

The SBA encourages longer terms, but actual loan maturities are based on the purpose of the loan and the useful life of the assets financed. In general, though, 7(a) loan maturities can go from seven years for working capital, to a maximum of 25 years for land and buildings or debt refinancing.

Finally, interest rates are negotiated between the borrower and the lender. However, since rates can be an important factor in the repayment ability of borrowers, the SBA has established limits that vary according to the size and maturity of the loan.

For more information about SBA’s loan programs, visit www.sba.gov/financing.

For lender contact information, visit www.sba.gov/az or call 602-745-7200.

Bruce Hodgman is the deputy director of the Small Business Administration in Arizona. [email protected].

Reprinted from AzNetNews, Volume 25, Number 1, February/March 2006.