Explore SBA-Backed Loans When Your Business Needs Cash

The federal Small Business Administration doesn’t hand out money, but it backs loans that can help your business grow

Explore SBA-Backed Loans When Your Business Needs Cash

Ami Kassar

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Where does a contractor turn when he or she needs an infusion of cash to buy a new piece of equipment, launch a new service offering or build a new shop? The first stop for funding toward a new hydroexcavator might be the friendly hometown banker who knows you and your business. Or you might approach that well-heeled uncle to invest in your business to help you take that next step.

If you exhaust those two options, consider going to the Small Business Administration, a federal agency that doesn’t operate as a bank but acts as a valuable conduit to lenders predisposed to work with businesses like yours.

You might think the SBA is a big, bureaucratic behemoth that would be difficult to tap into for financial assistance. But that is just one of the misconceptions people have about the government agency, which has been around since 1953 and generally receives good reviews from the businesses it assists.

Let’s talk about three of the biggest myths surrounding the SBA that you may have heard:

The SBA lends money

Although the SBA can directly lend money in cases of disaster, that’s not its main role when it comes to lending. Instead, it serves as a government guarantee program for banks and nonbanks.

That means it essentially serves as a backup to lenders who might otherwise not be interested in making loans to smaller and/or unproven businesses. It offers guarantees up to 85% for loans up to $150,000 and 75% for loans larger than that. Because lenders working with the SBA are less likely to endure the full brunt of defaults, they’re more likely to make loans to unproven businesses.

The SBA does set requirements and application process details. Applications will require personal background information, a business plan, personal and business credit reports, income tax returns, bank statements and a resume, among other things. It’s also possible personal or business collateral is required.

One benefit for the borrower is that loan terms tend to be longer (up to 10 years) and require smaller monthly repayments due to favorable interest rates.

The SBA is only for mom and pop shops

Mom and pop shops are among the kinds of businesses the SBA is looking to help, but it can also work with much larger businesses. Through its flagship 7(a) program, SBA-backed loans can be as large as $5 million for needs such as working capital. And through its lesser-known 504(b) program, as much as $12.8 million can be obtained for businesses seeking to buy real estate or major equipment.

A $5 million or $12.8 million loan is way above what most small businesses need. While there’s no one-size-fits-all template for a typical SBA loan customer, most are businesses that are going to have anywhere between $50,000 and $5 million in annual revenues and up to 40 employees, which fits the scope of many companies in this industry. Those businesses are likely to be cash flow positive and profitable.

Of course, if mom and pop shops need a loan, small amounts are available, too. There are no minimum guarantee amounts for any SBA loan program.

My banker didn’t tell me about SBA-backed loans or said I’m not qualified, so I’m out

Not to fear: You’re most likely not “out.” About 2,200 banks and other lenders throughout the U.S. write SBA-backed loans. Each one uses the program differently and requires varying qualifications.

So even if one lender rejects you, it doesn’t mean that all will. It’s always worth trying another lender (or two or three) if you get rejected — advice that applies when seeking non-SBA loans as well. If you go to a doctor and don’t like what he or she says, you may get a second opinion; so why not do the same here?

In addition, there may be other reasons why your go-to lenders may not tell you about SBA loans. Perhaps they’re ignorant about the program. Or maybe their employer doesn’t give them incentives that make them want to push SBA loans; remember, your banker is trying to make a living, too, and might push you toward more profitable options for his or her own pockets.

It might even be something as simple as your banker doesn’t want to go through the necessary paperwork. Lining up an SBA loan usually does require more documentation than a regular loan. And large banks often aren’t interested in making small loans, which can be less profitable and riskier than larger loans.

So, if you get rejected for an SBA loan by a large bank, try a smaller bank, which may well specialize in the program and have lenders who are well versed in the process.

Under Further Consideration

Hopefully this clears up some of the misconceptions about the SBA and its lending programs. These programs work, as many business owners will attest, and there’s no downside in at least considering an SBA loan the next time you need funding. Its website, www.sba.gov, is helpful as well, providing further information in an easy-to use format.

About the Author

Ami Kassar is chief executive officer of MultiFunding LLC, a speaker and the author of The Growth Dilemma. For more information, visit www.amikassar.com.  



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