Despite what you might see on late-night infomercials or some
websites, none of the SBA's loan programs involve free money,
government grants or no-interest loans. In fact, the SBA
doesn't even lend funds directly to entrepreneurs--you'll
need to strike up a relationship with a loan officer at your local
bank, credit union or nonprofit financial intermediary to access
the programs.
But once you do, there's an array of resources aimed at
getting you the capital you need to start or expand your small
business. Last year, more than $50 million in SBA loans were being
provided per day to U.S. small businesses. For this
month's column, I thought I'd review the latest
descriptions and eligibility criteria for the SBA's three most
popular loan programs.
7(a) Loan Program
The 7(a) is the SBA's most popular loan program. As a
small-business owner, you can get up to $750,000 from your local
7(a) lender, backed by a partial guarantee from the SBA. Note that
the SBA is not lending you any money directly. What they are doing
is making it less risky for a local lender to provide you with
financing. 7(a) loans are typically used for working capital, asset
purchases and leasehold improvements. All the owners of a business
who hold an ownership stake of 20 percent or more are required to
personally guarantee the loan.
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Once your lender decides that 7(a) money is what you need,
you'll probably start hearing the names of the different 7(a)
programs. For example if you're borrowing less than $150,000,
you may be headed toward the Lowdoc program, which was
created in 1993 to reduce burdensome paperwork. A Lowdoc loan
application is a one-page form; your application is on one side and
the lender's request to the SBA for the guaranty for your loan
is on the other. The SBA responds to Lowdoc applications within 36
hours.
The SBA Express is a program for lenders with a good
SBA-lending track record. It's aimed at getting money--in this
case, as much as $250,000--quickly into the hands of entrepreneurs.
Based on the success of the SBA Express program, the SBA initiated
CommunityExpress, specifically designed to improve access to
capital for low- and moderate-income entrepreneurs and to provide
both pre- and post-loan technical assistance.
Eligibility: The eligibility criteria for the 7(a)
program are the broadest of all the SBA loan programs, but
they're still quite restrictive for startups and businesses
related to financial services. See this page on the SBA's website for a list
of the types of business that are eligible. In general, all SBA
programs are targeted at small companies (that is, businesses with
less than $7 million in tangible net worth and less than $2.5
million in net income), but typically most banks won't lend to
startup businesses that don't have two to three years'
worth of financial statements and some owner's equity in the
business. Some banks will allow you to use money from relatives as
part of your equity, but you're required to formalize these
loans with a repayment plan that's subordinate to the bank
debt.
504 Loan Program
The 504 loan program is intended to supply funds for asset
purchases, such as land or equipment. Typically, the asset purchase
is funded by a loan from a bank or other lender in your area, along
with a second loan from a certified development company (CDC)
that's funded with an SBA guarantee for up to 40 percent of the
value of the asset--which is generally a loan of up to $1
million--and a contribution of 10 percent from the equity of the
borrower. This financing structure helps the primary lender--the
bank--reduce its exposure by relying on the CDC and the SBA to
shoulder much of the risk.
Eligibility: Like the 7(a) program, the 504 program is
restricted to small businesses with less than $7 million in
tangible net worth and less than $2.5 million in net income.
However, since funds from 504 loans can't be used for working
capital or inventory, consolidating or repaying debt, or
refinancing, this program tends to exclude most service businesses
that need to purchase land or equipment. Personal guarantees are
also required for 504 loans.
7(m) Microloan Program
The Microloan program is presently under budgetary review, and
the political winds aren't currently blowing in its favor. The
program is intended to provide "small" loans of up to
$35,000 that can be used for a broad range of purposes to start and
grow a business. Unlike the 7(a) program, the funds to be loaned
don't come from banks; rather, they come directly from the SBA
(now you know why it's unpopular with the folks in charge of
the budget) and are administered to business owners via nonprofit
community-based intermediaries. To find the name of an intermediary
micro-lender in your area, visit this page of the SBA's website.
Eligibility: The Microloan program is startup friendly.
All new businesses are eligible to apply. Although the maximum loan
amount is $35,000, the average loan is approximately $10,000. The
only catch is that Microloan borrowers typically have to enroll in
technical assistance classes administered by the micro-lender
intermediaries. For some entrepreneurs, this is a very helpful
resource that provides cost-effective business training. Others,
however, perceive it as a waste of time, although it's a
necessary pre-condition to getting a Microloan.
Although I promised reviews of just the three top SBA loan
programs, I didn't want to fail to mention two other special
purpose loan programs targeted at serving particular types of
businesses. The Export Working Capital Program provides short-term
working capital to small, export businesses, and the DELTA program
provides both financial and technical assistance to help businesses
dependent on defense installations transition to civilian markets.
You can log on to the SBA's website to learn more about these two
programs.
The long and short of it is, if you need small-business loan
capital, there's probably an SBA program out there for you.
Asheesh Advani is Entrepreneur.com's "Startup
Financing" columnist and president of CircleLending,
a loan administration company that facilitates loans among friends,
relatives and business associates. Get a copy of Circle
Lending's free Small Business Financing Guide for startups.