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Small Business Administration

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 2006 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 2007. 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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