The following article was written prior to the Coronavirus pandemic and, while still valid, does not include additional financial benefits afford to small businesses in the CARES Act.
Given that politics are always a hot topic, you’ve likely heard plenty from both political parties about how government at all levels simply doesn’t work.
That’s not a new complaint, and just about everyone can share a story about some government nightmare they’ve endured.
But there’s a federal agency that bucks the trend: The Small Business Administration (SBA). The SBA enjoys broad support from all corners of the political spectrum – and deservedly so. That’s because the SBA, which dates to 1953, fulfills its mandate of helping small businesses.
Don’t believe me? Google it. Sure, you’ll find scattered complaints, but the SBA generally gets strong reviews.That said, the SBA doesn’t always get the credit it deserves and there’s a lot of misinformation going around as well, especially among entrepreneurs who are missing out on strong financing possibilities.
Let’s talk about three of the biggest myths surrounding the SBA.
Although the SBA can directly lend money in cases of disaster, that’s not its main role when it comes to lending. Instead, it serves as a government guarantee program for banks and nonbanks.
That means it essentially serves as a backup to lenders who might otherwise not be interested in making loans to smaller and/or unproven businesses – it offers guarantees up to 85 percent for loans up to $150,000 and 75 percent for loans bigger than that. Because lenders are less likely to endure the brunt of defaults, they’re more likely to make loans to unproven businesses.
The SBA does set requirements and application process details. Applications will require personal background information, a business plan, personal and business credit reports, income tax returns, bank statements, and a resume, among other things. It’s also possible personal or business collateral is required.
One benefit for you, the borrower, is that the loan terms tend to be longer (up to 10 years) and require smaller monthly repayments because of good interest rates.
Small, Small Businesses
Mom-and-pop shops are definitely among the kinds of businesses the SBA is looking to help, but they can also work with larger businesses.
Through its flagship 7(a) program, SBA-backed loans can be as large as $5 million for needs such as working capital. And through its lesser-known 504(b) program, as much as $12.8 million can be obtained for businesses seeking to buy real estate or major equipment.
A $5 million loan, not to mention a $12.8 million loan, is way above what a mom-and-shop needs.
While there’s no one-size-fits-all template for a typical SBA loan customer, most are businesses that are going to have anywhere between $50,000 and $5 million in annual revenues and up to 40 employees. Those businesses are likely to be cash flow positive and are profitable.
Of course, if mom and pop need a loan, small amounts are available, too. There are no minimum guaranty amounts for any SBA loan program.
But, My Banker Never Told Me ...
Not to fear: You’re most likely not “out.”
There are about 2,200 banks and nonbank lenders through the United States who write SBA-backed loans. Each one uses the program differently and requires varying qualifications.
Thus, even if one lender rejects you, it doesn’t mean that all will. It’s always worth trying another lender (or two or three) if you get rejected -- advice that applies when seeking non-SBA loans as well. If you go to a doctor and don’t like what he/she says, you may try another physician, so why not do the same here?
In addition, there may be other reasons why your initial lenders may not tell you about SBA loans.
Perhaps they’re ignorant about the program. Or maybe their employer doesn’t give them incentives that make them want to push SBA loans; remember, your banker is trying to make a living, too, and might push you toward more profitable options for his/her own pockets.
It might even be something as simple as your banker is lazy: Lining up an SBA loan usually does require more documentation than a regular loan.
And large banks often aren’t interested in making small loans, which can be less profitable and more risky than larger loans. So, if you get rejected for an SBA loan by a large bank, try a smaller bank, which may well specialize in the program and have lenders well-versed in the process.
Hopefully, this clears up misconceptions about the SBA and its lending programs. These programs work, as many business owners will attest, and there’s little to no downside in at least considering an SBA loan the next time you need funding. Its website, sba.gov, is helpful as well, providing further information in an easy-to use format.