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What you need to know about SBA loans,
but never asked
by Joseph Anthony
People seeking a loan to start or expand a small
business sometimes view the U.S. Small Business
Administration (SBA) as a mysterious black hole
that seems to swallow more money than it could
ever lend.
Sure, we all know there's this thing called
an "SBA loan." But, like a lot of government
programs, there are numerous misconceptions about
the SBA loan program.
Here are six things you need to know about SBA
loans and the loan process:
These are not loans from the SBA. Sure, we all
call them SBA loans. But, in fact, they are guarantees
that the SBA makes to lenders. The SBA itself
is not a lender. But a loan guarantee from the
government allows banks and other lenders to make
loans that they might not touch otherwise.
"More overall debt than we like to see, too
little collateral, startup ventures — those
things will trigger an SBA response from us,"
says Allan Kauders, senior vice president for
Fleet Boston Financial in Hartford, Conn. Fleet
Boston says it made more loans in fiscal year
2000 than any other bank — 2,913 in all,
averaging about $60,000 per loan.
While it's not a loan from the SBA, the SBA
does apply standards. The SBA-guaranteed loan
process starts like most other loans — with
a local bank. Any small-business person can walk
into any bank and ask about a loan. The SBA becomes
part of the equation once the bank determines
that it's not willing to make the loan without
the SBA's guarantee.
The SBA will want financial information similar
to that required by a lender — three years
of financial statements; information on leases,
accounts receivable and accounts payable; cash-flow
projections; personal financial statements, and
so on.
Interest rates may vary, but they're better
than many alternatives. The SBA does not set interest
rates on the loans. However, it does mandate,
for example, that loans of seven years or less
be at no more than 2.25 percentage points above
the prime rate.
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"I laugh when I see 'finance your
business through us' promotions from credit card companies,"
says John Evans, a counselor with the Small Business
Administration's Service Corps of Retired Executives
(SCORE). "Loans that are guaranteed by SBA are
generally 2 1/4 to 2 3/4 over prime. Unless there's
some sort of unusually low offer, you have to have a
pretty good business going to be able to afford to finance
it on the typical credit card."
Collateral is important, but cash flow is key. One
reason a business might qualify for a SBA-guaranteed
loan is that the agency can give a little less weight
than the lender to how much collateral you are able
to put up.
That doesn't mean you're going to get out of lender
requirements, such as that you as the borrower personally
guarantee the loan to your business. "Of course,
we look at demonstrated willingness to repay and demonstrated
ability to repay," says Mike Stamler, an SBA spokesman.
"But conventional lenders are going to look at
credit-worthiness and collateral as key elements; they're
often looking for 100% or 150% collateral," he
adds. "Our key criterion is whether the small business,
after it receives the loan, will have the cash flow
to meet all its regular obligations plus the loan repayment."
Lots of lenders make SBA-guaranteed loans. More than
5,500 lenders made SBA-guaranteed loans in the year
2000. As of mid-April, the SBA had guaranteed 21,707
loans since the previous Oct. 1.
Small borrowers are welcome. Some "small business"
programs push the envelope on the definition of that
phrase. The government typically defines a manufacturer
with fewer than 500 employees as being a small business.
But SBA's guarantee program does seem to focus, at
least in volume, on smaller enterprises. Stamler says
that, as of April, about 62% of the loans guaranteed
nationwide were for less than $150,000.
"You're not necessarily going to get better terms
than you might get otherwise, but you're going to get
terms that are reasonable and on a loan that you otherwise
might not get at all," Stamler says. "It's
a great opportunity to get financing for a viable small-business
startup idea, or for expansion of an existing small
business."
For more information on SBA loan guarantee programs,
talk with a local lender, or check out the SBA's Web
site.
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