Since 1953, the Small
Business Administration (part of the Department of Commerce) has helped
entrepreneurs get capital to start and expand their businesses. The SBA
doesn't make grants to businesses, but rather provides loan guarantees
to encourage participating banks to make loans to small businesses.
The SBA can be an
attractive source for capital. However, as with many government programs,
the process is not easy. There are numerous requirements for applying
for a SBA loan, and if you get one there are some additional reporting
requirements. If you are considering applying for a SBA loan, be sure
to plan for at least 12 to 18 months for the process. Proper documentation
and properly completed applications can shorten the process somewhat.
Working with a bank or other lender that is familiar with the SBA process
can also make the process easier.
The most common
type of SBA program - 7(a) Guaranteed Loans
The most common form of SBA loan is a 7(a) guaranteed loan, with the loan
made by a private lender (often a bank) and the SBA providing a guarantee
on 75% of the amount of the loan. There are some maximize business size
restrictions on these loans. For example, a retail or service company
could have at least $6 million in sales (and perhaps up to $29 million)
and still be eligible. A wholesaler can have up to 100 employees and still
The maximum the SBA
will guarantee is $3,750,000 and therefore the maximum amount of the loan
is $5 million. The interest rate on SBA 7(a) loans is tied to the prime
rate. For loans with a term of 7 years or more the rate can be up to 2.75%
above prime. For loans shorter than 7 years, the rate can be up to 2.25%
While there are some
restrictions on the use of loan proceeds, such as floor plan financing,
payments to owners, paying delinquent withholding taxes or other "imprudent"
uses, generally proceeds can be used in the normal course of business.
Allowable uses of
- Purchase real estate
to house the business
- Construction, renovation
or leasehold improvements
- Acquisition of
furniture, fixtures and equipment
- Purchase of inventory
- Working capital
Applying for a SBA
loan requires completing various documents and may require collateral
or personal guarantees. Lenders may also charge some origination fees.
SBA loans can be a useful source of needed capital for many small businesses.
However, as with many government programs, there are additional paperwork
(often bureaucratic) issues to deal with as part of the process. Interest
rates are a couple percentage points over prime and repayment terms can
If you are considering a SBA loan, be prepared to spend some time and
effort. Being well organized, having patience and working with an experienced
SBA lender can make the process less burdensome.