Understanding Small Business Administration Financing
Access to capital and credit are keys to starting or growing a successful
business. Banks, savings and loans and commercial finance companies
seek loans that will be paid back in a timely fashion by borrowers who
show a commitment to their new venture by putting some of their own
money or equity on the line. They usually require the business owner
to guarantee the loan with personal assets because the business has
not established a track record. If you know you will need bank financing,
bring the banker in even before you complete your business plan. Establish
a banking relationship with a potential lender long before you need
a loan.
In addition, many government programs offer financial assistance,
including loan guarantees, asset-based financing, microloans, working
capital and revolving lines. The U. S. Small Business Administration
(SBA) enables its lending partners to provide financing to small businesses
when funding is otherwise unavailable. Funding is made available on
reasonable terms, with the SBA guaranteeing a portion of the small business
loan.
SBA lists 17 different loan programs; however the agency does not
currently provide funding for direct loans nor for low-interest rate
loans for business start-up or expansion.
SBA loan eligibility and credit criteria are very broad in order to
accommodate a wide range of financing needs. In guaranteeing the loan,
the SBA assures the lender that, in the event of default, the government
will reimburse the lending partner for a portion of its loss.
SBA loan programs include:
7(a) Loan Guaranty Program
Provides loans to small businesses unable to secure financing on reasonable
terms through normal lending channels. The program operates through
private-sector lenders that provide loans that are in turn guaranteed
by the SBA.
Repayment ability from the cash flow of the business is a primary
consideration in the loan decision process, but good character, management
capability, collateral and the owner's equity contribution are also
important considerations. All owners must provide at least 20 percent
equity to guarantee SBA loans. The proceeds of SBA loans can be used
for most business purposes.
Certified Development Company (504) Loan Program
Provides growing businesses with long-term, fixed-rate financing for
major fixed assets, such as land and buildings. A Certified Development
Company (CDC) is a nonprofit corporation established to contribute
to community's economic development. CDCs work with the SBA and private
sector lenders to provide financing to small businesses.
Typically, a 504 project includes a loan secured with a senior lien
from a private-sector lender covering up to 50 percent of the project
cost, a loan secured with a junior lien from the CDC covering up to
40 percent of the cost and a contribution of at least 10 percent equity
from the startup or existing small business being helped. In order
to be eligible for the long-term fixed rate loans, the business must
be for-profit; contribute to economic development; be owned by an
eligible, passive concern; and be leased to an operating company.
However, these loans cannot be used for refinancing, working capital,
inventory or investment property. To learn more, call Resources of
Missouri (RMI) at 800-234-4971.
Microloan Program
The microloan program provides very small loans to newly established
or growing companies. SBA makes funds available to nonprofit community-based
lenders , which in turn make loans to eligible borrowers in amounts
up to $35,000. The average loan size is about $10,500. Applications
are submitted to the local intermediary, and all credit decisions
are made on the local level.
The maximum term allowed for a microloan is six years. However,
loan terms and interest rates vary. The loan proceeds can be used
for business equipment, inventory, working capital and leasehold improvements.
For more information, contact RMI.
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Authored by: John Parfet, Business and Industry
Specialist, University of Missouri Extension
Source: Creating Quality Newsletter, Volume
11, Number 7, July 2002
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