The process of establishing small business invariably requires financial help at almost every step. There is little doubt that their requirement of financial help is more acute than established businesses. Yet, it is realized that such businesses often fail to qualify for loans from traditional lending institutions like banks, making it tough for them to look for reliable alternate sources of borrowing money.
Apprehensions and reservations of traditional lending organizations to grant loans to small businesses led to the creation of SBA or Small Business Administration, a United States government agency. However, it is imperative for prospective loan seekers to understand that loans are not provided by SBA straightway. SBA simply serves as a guarantor for a number of banks and private lenders who agree to follow a set of rules and regulations framed by SBA to offer loans to start up businesses under their agreement. The idea is to encourage lenders to provide start up loans to small businesses or entrepreneurs who are chasing financial success and simultaneously strengthen the economic status of the country. SBA examines and regulates the working of these lenders through which it offers loans to start up businesses.
SBA has various loan programs on offer, effectively planned to cater to varying financial requirements of small businesses. Here’s a brief description of some of the more popular loans provided by the SBA:
SBA guaranteed 7(a) small business start up loans are intended for borrowers interested in starting or expanding their own business and even for acquiring small business entities. The typical borrower lacks the much required collateral to secure a loan and has insufficient equity to get started with their venture. The maximum amount backed by SBA guarantee is about USD 2 million, with the SBA guaranteeing up to 75% of the loan amount. Administrative fees for processing of loans have been abolished on loans availed on or after February 17, 2009, with retrospective effect. Lenders that have approval of SBA for participation in SBA lending programs are eligible to offer SBA guaranteed small business loans. Those operating home based business are also eligible to apply for this loan as long as they fulfil the standard eligibility and credit conditions.
Again, these loans are offered to start ups, recently established, or growing small business entities by nonprofits intermediaries who obtain funds from the SBA. The ceiling for availing a micro loan is restricted to USD 35,000 only, though the average amount of loan extended to a borrower in this category is USD 13,000. The borrower needs to submit an application to the local intermediary who carefully decides on providing loan to the aspiring entrepreneur.
504 Certified Development Company Loans
These loans are intended for expansion of small business enterprises by providing long-term, fixed-rate financing for the purchase of fixed assets, viz. land, building, machinery, and equipment. The borrower needs to provide a small amount of equity whereas the remaining part is shared between the bank/primary lender, and a certified development company (CDC). The part of the loan from the CDC comes with a SBA guarantee for loans not exceeding USD 4 million.
SBA-backed loans are normally available for retail, services, food, accommodation, construction and manufacturing industries. These loans focus on helping minorities and women-owned businesses so that these become self sufficient and successful ventures that benefit the society by increasing employment opportunities.
Here are the most vital factors for qualifying such a loan:
1) Business Plan: Unless the entrepreneurs submit a business plan, they are likely to be refused loans. The lender should be convinced of the capability of the borrower in returning the borrowed amount. The business owner should be able to justify the need for a loan and the purpose for which borrowed funds will be used.
2) Cash Flow: The borrower is required to provide credit history of his business. It’ not unusual for some lenders to use your personal credit score to assess credit worthiness of business. Loan seeker is required to produce financial records including cash flow, balance sheet, income statement, accounts receivable and payable plus income statement. It is imperative to show sufficient amount of cash flow with respect to the loan amount. If cash flow is too good, the borrower may think the loan is unnecessary but if it is too bad, it may spoil their chances of obtaining loan.
3) Repayment History: Lenders prefer helping borrowers who they think would make a sincere effort of repaying loan. Businesses with proven record of repaying debts stand a better chance of qualifying for loans.
4) Collateral: Though all SBA lenders don’t insist for collateral, it plays a very significant role in the process of lending. The more the risk, the more is the probability of lender asking for collateral. A well prepared business plan coupled with excellent financial statement can substitute for collateral. For example, if you are asking for a loan of $100,000 and you are offering equipment worth $50,000 as collateral, the lender is more likely to help you getting the desired loan.
Before submitting an application, the borrower should assess the above factors. They should also look for and compare different lenders as each lender has its own criteria for granting loans. Yet, businesses with good credit history and cash flow would generally be able to qualify for SBA loans.