Small Business Loans using the SBA

I hesitated to include the U.S. Small Business Administration (SBA) as one of the alternative sources of financing in my site. After all, that particular government agency has become almost a mainstream source of financing for small businesses. The U.S. Small Business Administration, established in 1953, provides financial, technical and management assistance to help Americans start, run, and grow their businesses. With a portfolio of business loans, loan guarantees and disaster loans worth more than $45 billion, in addition to a venture capital portfolio of $13 billion, SBA is the nation's largest single financial backer of small businesses. Every year, the SBA offered management and technical assistance to more than one million small business owners did. The SBA also plays a major role in the government's disaster relief efforts by making low-interest recovery loans to both homeowners and businesses. 

My experience with the SBA is limited. I can remember working on only 5 or 6 loans with an SBA component during the last six years. I have also participated in a couple of seminars sponsored by the SBA. If I remember correctly, they even gave me some sort of diploma once certifying me as an approved lender. Frankly, it has been so long that I have forgotten what that piece of paper said or where the heck I left it. The reason why my experience is limited on these particular types of loans is that the two banks where I have worked do not go out of their way to encourage SBA guarantee loans. The reasons behind their lack of enthusiasm are that involving a third party specially a government one requires additional paperwork and expertise. On the other hand, there are a lot of other banks that work closely with the SBA and you will not lack places that can help you with your application process. You should also be aware that the SBA not only works with banks, but also works with other financial institutions that have nationwide coverage.

How does the SBA work?
Contrary to popular belief, the primary function of the SBA is not lending money, but acting as an "insurance" agency for banks. The reason behind this is that they can achieve much more using their budget this way than just lending it out themselves. They also lend money directly, but it is a very small portion compared to the amount they guarantee. The following is a list of the loan programs offered by the agency that have the largest impact on you as a small business owner:

The lowdoc loan program: This is a personal favorite of mine. Regrettably, I have never actually worked with a lowdoc request. I like this program because of its quickness. Supposedly, a prospective borrower could have an answer in a couple of days. The program is limited to a maximum amount of $150,000. 

The 7a Loan Guaranty: The 7(a) Loan Guaranty Program is the SBA's primary lending program. It provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans which are, in turn, guaranteed by the SBA. 

CDC – 504 Loan: The 504 Certified Development Company (CDC) Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from the CDC (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost, and a contribution of at least 10 percent equity from the small business. In other words, it is a loan program that helps businesses buy buildings to house their operations using only 10% down payment, a bank that lends 50% and the sells a second mortgage to investors that hold a second mortgage in the property. 

The three programs listed above are the most common types of SBA loans that you might encounter or need. The agency also offers many other types of programs, if you are interested in looking at the whole array of programs offered CLICK HERE.

Some questions about getting an SBA loan
How do I apply for an SBA Loan?
The SBA does not lend money directly. You will have to contact a local lender and discuss your loan proposal with one of their loan officers.

Where do I find an SBA lender?
I would personally look for a local SBA lender in two places. First, the business section of your local newspaper and second the yellow pages. Look for those lending institutions that advertise themselves as SBA lenders. If that does not work contact the SBA Distric Office and request for a list of institutions in your area.

What is the lender going to ask?
Your loan officer will want to discuss your proposal in depth. He will ask you for both financial information on yourself and your business and personal information about you to determine your business experience. If the request is related to a business you are thinking of starting, the officer will want to see a business plan. You might want to check out my Business Plan Tutorial

What does the SBA wants to see in my application?
Depending on the type/size of your request and the relationship your lender has with the SBA, you might get approved by tour lender alone. The SBA will look for the same things the lender does such as repayment capability and business experience.