SBA Offers Financing Opportunities
By Ed Burke

The United States Small Business Administration ("SBA") was created in 1953 to aid, counsel, assist and protect the interests of small business concerns. The SBA provides quality information and assistance to the entrepreneurial community through a variety of sources and loan programs. The SBA's most popular loan program, the 7(a) Loan Guaranty Program, was designed to provide credit enhancement for small businesses, allowing banks and other financial institutions to extend credit on otherwise "unbankable" transactions. The SBA basic guaranty program is used to promote small business formation and growth by guaranteeing long-term loans to qualified businesses.

The SBA works in conjunction with private lending partners consisting of banks, "non-banks," and other commercial lending institutions by guaranteeing up to 75% of the loan amount up to $750,000. The SBA's guaranty allows lenders to provide credit to small business concerns that would not typically meet those institutions lending criteria. As more and more banks collide and merge, these larger institutions cannot always meet the needs of small business. This has created a large demand for SBA Guaranteed Loans that has been instrumental in the growth of the SBA and non-bank lenders. The SBA has issued licenses to fourteen national non-bank lenders who provide financing for businesses through the SBA 7(a) Loan Program.

The SBA can be very flexible in the structuring of their loans, but typically, a prospective borrower must provide the following: 1) approximately 20% to 33% equity on hand (cash or equity established in the business); 2) a reasonable, well thought out business plan which includes detailed financial projections, and; 3) complete personal information consisting of personal financial statement, personal history and three years historical tax returns. As the SBA is a "cash flow" lender, historical financial statements or detailed projections need to indicate a reasonable assurance of repayment ability. This means that the SBA lends money on your demonstrated ability to generate enough cash every month to make your loan payments. Management experience is also one of the biggest factors that the SBA looks at in determining eligibility. Significant experience in the industry or related industry of your business gives you much more credibility with both the SBA and the Lender. One of the most important criteria that the SBA looks at is also one of the hardest to measure, "Character." Character of an individual is hard to quantify, but a good indicator is prior credit history. As shown on a credit report, a history of prompt payment of existing debt is a good indicator of how a Borrower will repay any new debt. Historical derogatory credit will not necessarily disqualify a Borrower, but a letter providing a reasonable explanation of the events that contributed to the incidents such accompany your application.

SBA loans offer significant benefits that often out weigh the additional documentation that may be required. First, the SBA will guarantee a loan to a start-up. Without historical records indicating repayment ability, a start-up is a risky venture for a Lender. The SBA guaranty provides a comfort level that allows the Lender to provide credit for this type of loan. Second, there are no call provisions in an SBA loan authorization and agreement. Consequently, a bad year of business operations will not have your loan called for failure to maintain specific debt to equity ratios. Third, the SBA offers significantly longer terms than a traditional commercial loan. Terms typically are up to 25 years for a real estate loan, 10 years for machinery and equipment, and 7 years for working capital. The longer terms reduce monthly payments, increase cash flow and make it feasible to borrow the full amount you really need. Interest rates are capped by the SBA at 2.25% above prime for a seven year term, and 2.75% for terms over seven years

Just as all banks are not the same, neither are all SBA lenders. Both banks and non-banks vary in their credit requirements and loan policies. If you are denied credit from one lender, ask why. If you can cure those deficiencies, great! You have gotten your loan. If not, try another lender. Many of the SBA licensed non-bank lenders are more aggressive and willing to extend credit when there are collateral shortfalls or other credit deficiencies. Remember, just as perseverance and hard work are important factors to successful business operation, so are they important to obtaining financing.