One of the most common misconceptions of small business owners is that the government, specifically the Small Business Administration (SBA), has a magical pot of money to give or loan to individual businesses. And while the SBA does have loan programs that support small business by working through banks and commercial lenders, they do not loan money directly to businesses. Let’s clear up some of the confusion.
The SBA works with banks and financial institutions by guaranteeing small business loans for the lender, increasing the likelihood that loans will be approved. The SBA has typically guaranteed 75 percent of loans, meaning that if a small business cannot repay the loan 75 percent of the loan value will be repaid by the government to the lending institution. The lender must still properly evaluate the loan, so SBA support is no guarantee that a loan will be approved.
There are various SBA programs designed for different types of loan needs, ranging from export assistance to funds to purchase a business, to funding for major asset purchases. The most common is SBA’s 7(a) loan program, where loan proceeds can be used for equipment purchases, short-term working capital needs, acquiring or expanding an existing business, and other areas, with loan limits up to $5 million.
The SBA’s 504 loan program is designed for long-term development projects such as building expansion or the purchase of major fixed assets and equipment. The 504 program combines funds from private sector lenders and Certified Development Corporations, which are nonprofit corporations established to aid economic development within its community. Alexander, Burke, Caldwell and Catawba counties are served by the Region E Development Corporation, which is affiliated with the Western Piedmont Council of Governments and located in Hickory. Since its inception in 1982, the Region E Development Corporation has participated in 79 504 loans totaling over $21.3 million. Although heavily involved with 504 loans, the Region E Development Corporation is also an excellent source of information about many of the SBA loan programs. You can visit them at http://www.regionecdc.org/.
SBA’s Microloan Program provides small, short-term loans to small businesses through designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. Maximum loan amount is $50,000.
In addition to being involved in the business loan process, the SBA provides on-line training for small business in such as areas as finance, government contracts, and start-up issues. They also connect businesses with SBA partners for business counseling. Learn more about the SBA by visiting their web site at www.sba.gov.
So which program is right for your business? It depends on the type of business, the size of the loan, and how you plan to use the funds. Should you pursue an SBA-backed loan? A SBA guarantee is not necessary in many situations, but the guarantee can push a financial institution that is considering your loan towards approval. Remember, not all financial institutions participate in SBA loan programs, so discuss this option with your banker early in the loan process.
Do you have a business question or topic that would make a good column? Send your ideas or questions to me at jeff.neuville@b-assistnc.com and share your business experience with others.
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