Financing through the Small Business Administration
Many small businesses are unable to obtain financing and must turn to the Small Business Administration (SBA). The SBA is a federal agency that assists small businesses in financing their ventures through several different loan programs. The most common is the 7(a) loan program, in which the SBA acts as a guarantor for a loan made by a commercial lending institution. While there are some eligibility requirements, the vast majority of new, for-profit small businesses are eligible for financing through the SBA. If you are a small business owner who is interested in exploring SBA financing options, contact our firm to schedule a consultation with an attorney.
Basic 7(a) Loan Program
The 7(a) loan is the primary lending option offered by the SBA. When a business seeks financing through the SBA, the applicant applies for the 7(a) loan directly from a commercial lending institution. The commercial lender decides whether to make the loan internally or require an SBA guarantee. The SBA only provides a guarantee to the lending institution that assures the lender that the government will reimburse a portion of loss in the event of default by the customer. Among the acceptable uses for the loan are working capital, machinery, construction, buildings and real estate. The terms of repayment and other specifics of the loan are negotiated between the lender and the applicant, not through the SBA.
Requirements of the 7(a) Loan Program
All businesses wishing to obtain financing under the 7(a) loan program must:
- Be for-profit businesses
- Meet the SBA size standards
- Have no available internal financing or inadequate internal financing
- Have the ability to repay
The eligible customer can be either a new or an existing business. The ability to repay is a primary consideration of the SBA. In addition, good character, cash flow, collateral and an owner's equity contribution are further considerations in obtaining an SBA loan. The SBA considers character issues including past credit history, past willingness to pay debts and criminal background. Possession of collateral will greatly enhance an applicant's chances for approval. It should be noted that an owner of more that 20% of the business needs to guarantee the loan personally.
Other Loan Options through the SBA
Certified Development Company (CDC)/504 Loan Program: The CDC/504 loan program provides long-term fixed rate financing for assets such as land and buildings. A CDC is a nonprofit corporation that works for community economic development and works with the SBA and private lenders to provide financing to small businesses.
Microloan Program: The Microloan program provides small amounts of money (maximum of $35,000) to new or growing small business. The SBA makes money available to nonprofit community lenders that then make loans to eligible borrowers.
Conclusion
The small business owner who is unable to obtain other means of financing and meets the eligibility requirements should consider financing through the SBA. The SBA does not lend money directly, but rather acts as an intermediary and guarantor of the loan. Your commercial lending institution should be consulted before beginning the process of obtaining an SBA loan. If you have questions about applying for an SBA loan, contact our firm to schedule a consultation with an attorney.
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