The Small Business Administration guarantees loans provided by SBA-approved financial institutions, rather than lending directly to businesses. They have several different loan programs available, depending on the specific purpose of the loan. The loans have different borrowing limits and come with varying levels of repayment guarantee for the lender against default.
Before you approach a bank for a loan, you need to do your homework. The SBA website, at www.sba.gov, provides detailed evaluation criteria for the different loan types. You should also consider taking advantage of the SBA training, counseling and mentoring programs. Another excellent local resource is the Small Business Development Center at Kennesaw State University. Their counselors can provide unbiased opinions on whether your business is a good candidate for an SBA loan, or if you should consider finding outside investors. These free to low-cost programs can help you write a business plan, structure your business and provide guidance on preparing your loan application.
When you’re ready for financing, consider leveraging the relationship you have with your current bank. The loan officers should be able to tell you if they are interested in small-business lending and the available loan programs that may work for your business. The day you apply for a loan should not be the first time you meet the loan officer. Many banks will discuss your options with you; however, if your bank is not interested in lending, you can obtain a list of SBA-approved institutions on the SBA website.
Depending on the type of SBA loan, you may need to meet supplementary criteria in addition to the lender’s qualifications. The most common SBA loan is the 7(a) Loan Program, because it can be used for both start-ups and existing businesses, and for a wide array of purposes, including equipment or real estate purchases, working capital or debt refinancing. 7(a) loans are capped at $5 million.
When applying for a 7(a) loan, be prepared to provide your personal background and financial statement. Lenders factor in how much of your own assets have been invested in your business, your earnings record and the assets you can offer for collateral as a last source of repayment. If you are a start-up, you will need a detailed, two-year projection of income and finances, a minimum 12-month cash flow projection, and a comprehensive business plan on how you will achieve these goals. You may also need to try to secure start-up resources from friends or former and current business associates. Most banks want to see a potential business owner contribute at least 20 percent to 40 percent of the needed financing.
Oftentimes, an individual may possess the technical expertise necessary for a particular business venture; however, they lack knowledge in other important areas such as management, marketing, financial records, etc.
Aligning yourself with the available financial experts and fully taking advantage of the resources available for entrepreneurs should greatly enhance the potential for a successful venture.