The Small Business Administration (SBA) offers a wide variety of educational materials and seminars for both current and aspiring small-business owners. They also provide financial assistance through loans and loan guarantee programs. In recent years, these programs have become significantly more user friendly, and today the SBA is an excellent resource for the capital-seeking small-business owner who has trouble finding funding through the conventional private-sector sources.
An SBA loan is a loan made by a local lender (bank or nonbank) that is, in turn, guaranteed by the Small Business Administration (SBA). The SBA provides its back-up guarantee as an inducement for banks to make loans that otherwise may be a little too risky from a banker's perspective. Only in rare cases does the SBA actually provide the money itself.
SBA loans usually provide longer repayment terms and lower down payment requirement ratios than conventional bank loans. They are available to most for-profit small businesses that do not exceed the SBA's parameters on size (which can vary depending on the industry). SBA loans can be used for a number of reasons, including (in infrequent cases) start-up monies, if you have sufficient collateral in long-term, tangible assets, such as real estate, machinery, and equipment.
Getting an SBA loan is not a slam-dunk occurrence; to the contrary, the agency is extremely selective about whom it approves. Take a look at the primary criteria the SBA looks for when considering guaranteeing a loan:
- The owner must have invested at least 30 percent of the required capital and be willing to guarantee the balance of the loan.
- The owner must be active in the management of the business.
- All principals must have a clean credit history.
- The business must project adequate cash flow to pay off the loan, and the debt/net worth ratio must fall within the SBA's approved guidelines.
SBA loans have a reputation for being cumbersome and subject to enormous red tape. This reputation had been deserved in years past, but technology has made inroads everywhere, even in the government. The SBA's "LowDoc (low documentation) Program," for loans under $100,000, processes loan requests in less than 48 hours and requires that the borrower fill out only a one-page application form. Other documentation the borrower can be expected to furnish when applying for an SBA loan in excess of $100,000 include a personal financial statement, three years of tax returns, and three years of financial projections.
To find a local bank or nonbank institution that works with the SBA, look in the Yellow Pages for SBA "Approved Lending Sources" (ALS) or call the SBA at  800-827-5722. If you're on the Internet, check in to the SBA Web site for other loans that may work for you.
Small Business Investment Companies (SBICs)
Small Business Investment Companies (SBICs) are privately owned, quasi-venture capital firms organized under the auspices of the SBA. SBICs either lend money to, or invest money in, small businesses primarily within their local area. Categorized as "Federal Licensees" (meaning the federal government has given the SBIC its stamp of approval), SBICs either fund start-ups or provide operating funds with which to expand existing businesses. Through their relationship with the SBA, they are also able to offer particularly favorable terms and conditions to "disadvantaged businesses."
Hundreds of SBICs operate around the country. To learn more about them, call the SBA or check out the SBA's Web site.
Certified Development Companies (CDCs)
Another program of the SBA, the CDC program (also known as the 504 Loan Program), provides long-term (10- and 20-year), fixed-rate loans for small business. This program focuses on financing fixed assets such as real estate (land and buildings). CDCs work with a local lender; typical financing may include 50 percent from the local lender, 40 percent from the CDC, and 10 percent down from the small business being helped. The asset being purchased acts as the collateral.
Several hundred CDCs exist nationwide. For the CDC nearest you, call the SBA or visit the SBA's Web site and inquire about the 504 Loan Program.
Angels: Investors with heart
The SBA has instituted Active Capital. Log on to Active Capital and you'll discover a mix-and-match format designed to bring together aspiring small-business start-ups and accredited small-business investors. The accredited small-business investor must have a net worth in excess of $1 million or net income in excess of $200,000.
For those of you who wish to find an angel in your own backyard, your state or city may have an angel-matching program. Ask local bankers, accountants, financial advisors, or lawyers for their input on how to find a local angel-matching program; call your local Chamber of Commerce; or call your state's Department of Commerce.
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