Small Business Administration Loans

Small Business Administration Loans - LoansPedia

The Small Business Administration, a division of the US Federal Government, is one of the largest business lenders in the United States. The SBA, as it is known, guarantees loans made directly to business owners, allowing them to access capital when and where traditional lenders might otherwise pass them up.

A common misconception is that the Small Business Administration provides loans directly to business owners. This isn’t the case. Instead, the SBA merely agrees to back the loan, often in underwriting insurance for the lender, which then securitizes the loan and improves the business owner’s chance of securing funding.

How much can you borrow?
Small Business Administration loans are generally made for no more than $1 million. That is, beyond $1 million, the SBA will not agree to back the loan, and the loan is then written on the credit of the business or the credit of the business owner through a personal guarantee. At any rate, there are a few exceptions. The 7A lending program, for example, offers exporting companies affected by NAFTA to borrow as much as $2 million, though such instances are rare.

How to qualify?
In general, a small business is defined as any company which operates in the United States or US territories and has fewer than 50 employees. In some cases, the limit for employees is lower, as is often the case for inexpensive, small dollar loans, or for larger loans intended only for major exporters.

Before applying, you need to first seek out a loan from a traditional source, whether it be a commercial lender or even a local credit union. This process will tell you a lot more about your business’s opportunity to find financing, as bankers are keen on referring small business owners to the SBA if they deem it to be appropriate. Since the founding of the SBA, such referrals have become commonplace. The banks who write the loans want a guarantee, and they also want to be able to ink a deal, so they refer borrowers to the Small Business Administration.

Once you begin searching for a loan, a bank should be able to tell you under what circumstances it would be willing to lend the money to you or your company. SBA guaranteed loans carry a lower rate of interest, as they are less risky, though they do require some additional legwork. All around the country, the Small Business Administration processes loans in district headquarters, which can be found in every state, but not every locality.

How to boost your chance of getting funding
There are a few things you can do to make sure that a bank will issue you credit directly, or with an SBA guarantee. Those things are:

Perfect your pitch – When you go to buy a home, you’re evaluated on your ability to repay. When you go to borrow money for your existing business, or for a new start-up, you’re showcasing your ability to repay and also your ability to run a successful enterprise. Commercial lenders are tasked with the job of asking you questions, so have plenty of well thought out answers to common objections.

Business plans – A business plan is an absolute must for finding business credit. A business plan should be long enough to include the details, but short enough that it does not chase down small, minute details. A plan is a framework; it is not a step-by-step manual. It should be attractive, easy to read, and filled with information that shows you and your business are a future success story.

Put your money on the line – Nothing gives a lender confidence in a business like a business owner that is willing to put their neck on the line, too. Do not expect that a bank will fully-fund a new startup venture. Instead, they want to be part of your business, not the whole of your business. Putting up your own money shows that you’re confident enough that the business will work, and that you’re willing to risk your own money in its future.

Loans should aid growth – Ideally, you’ll be going to a lender to obtain a loan that will help your business grow. Lenders like to see that the money they lend to your business will provide you with some kind of growth. A common request is money to cover accounts receivables. If you can tell a lender that you have a backlog of orders that you’d like to fill immediately, but can’t fill due to cash flow, then you’re highly likely to walk away with a loan, as it’s almost a no-risk loan for the lender. Also, you might walk out with a non-small business administration loan, since your business is clearly capable of paying back the money.