How small businesses can get the funding they need to succeed
Small businesses make up 99% of all businesses in the United States and sadly, half of them don’t last five years.
Most small businesses fail because they lack capital to start up, operate, or grow. Many entrepreneurs, believing they’re “unbankable,” borrow money from relatives, max out their credit cards, or simply cross their fingers and hope for the best.
If you’re in this boat, your struggles are all too real—but might be unnecessary. The capital you need to succeed might well be available through Small Business Administration (SBA) loans, a helpful resource that’s been around for more than 50 years, but is still little known and underutilized.
SBA loans offer vital resources for small businesses, but are underutilized.
What is the SBA, and how can it help?
The SBA is an independent agency of the federal government, formed to incubate and grow businesses and jobs. To that end, the SBA helps small businesses with the spectrum of small business challenges, from creating a business plan to obtaining capital to expanding into new markets to disaster assistance. And actually, some “small businesses” aren’t small at all: SBA classifies any business with fewer than 500 employees as a small business.
The SBA’s embrace is wide, but its value-adding benefits are under-publicized and under-utilized. According to Pamela Innis, a senior SBA specialist at Republic Bank, which is the #1 SBA lender by dollar volume in the NY-NJ-PA tri-state area, “Most people associate SBA only with lending,” she says. “But the SBA offers a multitude of free, valuable resources for small businesses, including consulting and mentoring. We enjoy helping customers take full advantage of those resources.”
The SBA is also committed to expanding access to funding. The SBA has a number of outreach initiatives aimed at underserved groups and communities, including women, veterans, and LGBT business owners.
What kinds of businesses are eligible for SBA financing?
SBA loans are available for multiple business purposes, including real estate acquisitions and construction, business acquisitions, equipment purchases, and working capital lines of credit.
And most business types can qualify, including so-called “cash businesses.” For example, Innis, who has more than 35 years’ experience in the SBA arena, has closed SBA deals for restaurants and hotels; medical and veterinary practices; building trades (plumbers, electricians, HVAC contractors); car washes; funeral homes; retail, convenience and liquor stores; manufacturing plants; information technology companies; and partner buyouts. Her lending footprint covers New Jersey, Pennsylvania, New York, Connecticut, Delaware, and Maryland.
“Overall,” says Innis, “There are more deals we can do than we can’t.”
Through SBA loans, lenders can invest in people, not just businesses.
How do SBA Loans work?
The SBA itself doesn’t make direct loans. Instead, SBA encourages and enables participating lenders, such as banks or credit unions, to make loans to small businesses by guaranteeing a percentage of each loan.
The SBA can guarantee up to 85% of a loan under $150,000, and 75% of a loan over $150,000. Although there is no minimum loan amount, the maximum amount is $5,000,000 and the maximum SBA guaranty for any single business is $3,750,000.
What SBA Loan programs are available?
The SBA offers three loan programs. The maturity and interest rate for each loan depends on the program.
The most popular program is the Basic 7(a) Loan. According to Innis, Basic 7(a) Loans generally have 7 – 10 year terms and offer fixed and variable interest rates of about 10%, though the SBA imposes a maximum rate the lender can charge.
The other two SBA programs are 504 Loans and Microloans. 504 Loans are used to finance long-term assets, refinance existing debt, or make capital improvements to reduce energy consumption. 504 Loans have 10 – 20 year terms, with interest rates between 5 – 6%. Microloans must be less than $50,000 and have a maximum term of 6 years; interest rates range from 8 – 13%.
What are the financial benefits of SBA funding?
If you’re a small business entrepreneur, SBA loans offer three significant economic benefits.
- Lower monthly payments. SBA loans have longer terms than typical business loans.
- Budgeting comfort. Because SBA imposes a maximum interest rate, you’ll know your worst-case debt service load going in, and can plan for it.
- No balloon payment. Typical business loans require a lump-sum, “balloon” payoff after three or five years. SBA loans are fully amortizing, or self-liquidating. This means the loan is automatically paid off at the end of the term.
According to Innis, SBA loans are a “win-win.” “With SBA backing, we can lend to more customers and make longer-term commitments to their businesses,” she says. “For our customers, their chances to succeed are dramatically increased. We can win a customer for life, and our customer can win a business for life.”
For all of its attractions, SBA loans are not a substitute for poor credit. Just like any other bank loan, SBA loans are underwritten and evaluated according to a borrower’s ability to repay, based on financial statements and tax returns, suitable equity and collateral, a solid business plan, and the borrower’s resume.
However, the SBA considers other factors beyond conventional lending formulas, and will even approve loans to start-up business without proven cash flow. “SBA will approve ‘character loans’,” Innis says. This means that SBA will back loans based on projected repayment revenues from a reasonable business plan, and a borrower’s expertise, commitment, and good character. “This is huge,” Innis says. “It helps our bank invest in people, not just businesses.”
Aren’t SBA Loans hard to get?
Many believe that getting approved for an SBA loan is a paper-intensive, and time-consuming ordeal. Innis says this is a common misconception. “Sure, there a few extra hoops to jump through compared to a conventional loan,” she says. “But the benefits far outweigh the added time and effort.”
The amount of extra SBA paperwork depends on the loan amount. Loans under $350,000 usually require less paperwork. “Regardless of loan amount, we help customers gather their informal information and work with them to fill out SBA forms,” Innis says. “We try hard to make the process as painless as possible.”
Depending on the loan amount, it can take 30–90 days from application to closing. But the process can sometimes be expedited. For example, Innis has closed SBA deals in less than 30 days.
You might be bankable after all.
What’s the bottom line?
- SBA welcomes entrepreneurs of all stripes, and supports loans for most types of business and business purposes, offering dramatically broader access to funding for small business.
- SBA loans offer longer payout terms, lower payments, budget predictably, and freedom from the dreaded balloon payment.
- SBA guaranties enable lenders to make loans they couldn’t otherwise make—and give people a chance to succeed they wouldn’t otherwise have.
In fact, you might be bankable after all.
- SBA Office of Advocacy, “Frequently Asked Questions,” March, 2014, available at [https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf2]. Accessed September 22, 2016.
- SBA Office of Advocacy, Small Business Bulletin, “Small Business Market Update, June 2015,” available at [https://www.sba.gov/sites/default/files/Small_business_bulletin_June_2015.pdf3]. Accessed September 23, 2016.
- SBA Office of Advocacy, “Survival Rates and Firm Age,” available at [https://www.sba.gov/sites/default/files/SurvivalRatesAndFirmAge_ADA_0.pdf4]. Accessed September 23, 2016.
- U.S. Small Business Administration, “Resource Guide for Small Business,” Fall 2015/National Edition, available at [https://www.sba.gov/sites/default/files/files/resourceguide_national.pdf5]. Accessed September 23, 2016.
Credit: HFS&L intern Melissa Malik researched and was lead writer of this article.