Getting a new business off the ground requires money up front, and there are a number of ways fledgling operations can get more cash on hand without dealing with a traditional bank. Like polar fleece and electric skateboards, stories about getting a loan from a nonprofit microlender, launching a crowdfunding campaign or hitting up mom and dad (or maybe a rich uncle) are pretty common among startups. Yesterday, we talked about what to watch out for when hunting for a loan; today, we’ll walk through one of the biggest loan options.
If you’re a few years into your business and can show a solid revenue stream, an SBA loan might be for you. It’s backed by the federal government and offered through banks with relatively low interest rates, since the SBA guarantees them for 75% to 85% of the loan’s value. This makes it a less risky endeavor for banks, and if you qualify, loans up to $5,000,000 are available and can be a great way to take your operation to the next level.
Is an SBA Loan Right for You?
The Small Business Administration (SBA) was created in 1953 and, for better or for worse, little has changed in terms of what they offer would-be Warren Buffetts. The SBA is in some ways uninterested or blind to the rise of startups and online businesses that dominate today’s entrepreneurial landscape. This means that if you are trying to land enough cash to get your mail-a-potato business off the ground, an SBA loan probably isn’t for you.
In order to qualify for its most standard product, the 7(a) Loan, applicants must prove their company’s profitability via P&L reports, tax returns, and a litany of further documentation.
One thing to remember is since the SBA is just the guarantor of the loan, actual terms, interest rates, and the criteria by which applicants are awarded money will change from bank to bank.
Denise Beeson is a Northern California SBA loan officer and lecturer who has taught business management for more than 20 years. She points out that some banks are more likely to offer loans to businesses in certain sectors more than others.
“Let’s say you wanted to buy a bed-and-breakfast,” she says. “There are several lenders in the marketplace that will lend to bed-and-breakfasts, but there are far more that will not lend to that type of business entity. One thing you have to consider is what will be requirements you will need to comply with for them to even consider your loan package,” says Beeson.
There’s also an extensive list of ineligible businesses available on the SBA website that anyone thinking of securing cash in this manner should check out. For example, gambling halls and strip clubs are summarily barred from any SBA funding, as are political lobbying firms and pyramid schemes (believe it or not!).
So Who Are They For?
SBA Loans are for profitable businesses that want to expand. According to the SBA website, 7(a) loans may only be “used to establish a new business or to assist in the operation, acquisition or expansion of an existing business.” In other words, you can’t take out an SBA loan and pay yourself a hundred grand a year.
You also must demonstrate that you have no other access to capital. “SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing,” the site says.
Sound like a good fit? If that’s the case, you may want to start amassing the mountain of necessary paperwork and comparing offers from different lenders that administer SBA loans.
Along with making sure that a prospective bank offers loans in your particular industry, you should also look into any other ancillary costs that may be associated with choosing certain lenders.
“Oftentimes, a bank is going to heavily cross-sell you to use their insurance, to use their processing equipment for credit and debit cards, to open a line of credit … any of the things that you would typically need for operating a business,” says Beeson, pointing out that the SBA charges a fee for its guaranty that is usually passed on to the borrower.
Beeson, who was once an SBA director at a small bank, says that banks are typically inundated with SBA requests, so it’s important to take caution when filling out all the paperwork. “You hear a lot of complaints about delay with SBA funding, and that’s because oftentimes the paperwork is not filled out correctly and the appropriate documentation just isn’t there,” she says.
Also, remember: The SBA is the government, and it doesn’t need your business. It doesn’t stand to gain anything beyond the guaranty fee by backing these loans, so it can be as nitpicky as it wants.
Here’s the bottom line: If you qualify and have the stomach for the paperwork and potentially protracted process of securing a lender, an SBA loan is a good source of solid money you’re not likely to get anywhere else.
And while it may be picky about eligibility, the SBA is apparently unafraid to back a mind-boggling amount of money to encourage folks to pursue the American Dream. According to the final weekly lending report of the 2017 fiscal year, the SBA guaranteed $25.4 billion in loans!
Now that it’s (technically) a new year, it may be a good time to get started on your fiscal resolutions.