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Contributing Authors

	Joe Kennedy Author of The Small Business Owner's Manual
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	Tom Severance Author of Business Start-Up Guide
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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	Steven D. Strauss Author of The Small Business Bible
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SBA Loans

The U.S. Small Business Administration (SBA) was formed in 1953 from the vestiges of a 1932 federal government program aimed at helping businesses recover from the Great Depression. The SBA is charged with the mission to “promote and assist small businesses by providing financing assistance through loan guarantees, management counseling and training, and assistance in obtaining government procurement contracts.” The SBA now manages over 200,000 loans to small businesses, totaling $45 billion. Beyond lending to small businesses, the SBA is also involved in providing disaster loans and conducting minority outreach programs. Our concern here is whether SBA loans make sense to you.

Small businesses do not communicate directly with the SBA but deal with various SBA-approved banks (Certified Lenders and Preferred Lenders) that discuss borrower needs, take the application, and work to gain approval. If the loan is approved, the deal is made directly between the borrower and the SBA-approved bank, and the SBA guarantees to the bank that a portion of the loan will be repaid (usually 50 percent or 75 percent). The SBA repays the bank only in the event of default.

SBA loans can be used to:

Construct, expand, or modernize commercial buildings, or purchase existing facilities for use by the borrower (and not for investment, rental, or speculative purposes)

Purchase machinery, equipment, inventory, furniture and fixtures, or leasehold improvements

Finance increased receivables and working capital

The SBA and its banking affiliates are not chumps, and this is not a source of easy government money. SBA loans may vary from $250,000 to $2,000,000, and a full-blown loan package will be needed. The application will be studied to make sure that a loan to your small business make sense and that the loan can be repaid from existing--not projected--cash flows. (Note that this precludes the argument, “Well, I don’t have enough money now, but if you make the loan, I will be able to repay from the new revenues.”) Further, the SBA normally takes all or some business assets as collateral, and usually requires a personal guarantee. If repayment terms are not met, the SBA and its banking partners repay the bank, but it will also seize and sell all pledged business and personal assets to recover as much as possible. During the approval process, loan committees will look to see if the principals are of good character with strong management skills, consider the net worth of the small business against the loan amount, and make sure other financial ratios are consistent with industry averages.

Not surprisingly, Small Business Administration loans are only for small businesses, and the SBA defines “small” as:

A business that is independently owned and operated, and is not dominant in its field.

Manufacturing: generally up to 500 employees.

Wholesale: maximum of 100 employees.

Services: varies by industry from $2.5 million to $20 million in annual revenues.

Construction: $7 million to $17 million in annual receipts.

Agriculture: from $500,000 to $9 million in annual receipts.