New businesses and the Small Business Administration (SBA)

Most first-time entrepreneurs have the impression that SBA loans are a simple way, way forward in the financing of any startup. While the SBA is a great American government program to help small businesses, keep in mind that this is a government program, with all that means distinction - the process is slow, the limitations are severe, and barriers to adoption are high . Before you commit countless hours and effort to pursue an SBA approval, it is important to understand the reality of the programs as well as other opportunities to fund the startup.

The SBA is well organized with special programs to cover different sizes of companies in different stages. The most common program for entrepreneurs is the SBA Regular 7a, which provides guarantees on loans to enterprises approved for establishment or expansion needs including working capital, equipment purchases and the like. These loan guarantees are not effective, but are intended to improve the chances of getting a formal bank loan. After all, if the federal government promises to repay 75% or more of the loan if the borrower defaults then the banks would be clamoring to provide loans, right? Not so much. In fact, banks are less inclined to service SBA guaranteed loans because of the requirements (see documents) provided in the regulations of the SBA guarantee, and the greatest risk to help small businesses. Find a bank serving a SBA loan is even more difficult if you are looking to finance a startup. The SBA requires a good credit score for staff also have the ability to guarantee the seventh, and banks will require excellent credit beyond your personal and real guarantees before they even think of borrowing money.

The program includes 504 in cash directly to the Certified Development Corporations, local area non-profit organizations that deal with business development in disadvantaged communities. This program is designed to provide up to 40% of the capital required for land and buildings for small businesses. The 504 is the money borrowed by the CDC, and the rest must be secured through a formal bank loan. Requirements vary, but in general the society to accept the loan is committed to creating jobs at a certain level, for example 50k for a new job for every dollar the SBA or other specific economic development or public policy goal, such as minority owned business. Again, good personal credit, collateral (usually long-term assets purchased with money), and the personal guarantee of owners are required. The Microloan Direct program is probably the most viable option for most start-ups. The SBA distributes about 20M a year for intermediaries, such as the national focal points for economic development throughout the country so they can provide loans up to 35k for businesses in their areas. The national focal points set up their own approval processes with some guidance from the SBA. The micro-average is about 13k and the majority of brokers also require collateral and a personal guarantee.

The recent stimulus plan includes incentives for banks to make SBA-guaranteed loans, including reduced costs and better guarantees to 90% of the total loan amount. Still, reports indicate that banks are not particularly influenced by these incentives and loans to small businesses, start-ups and in particular, remain limited. The main reasons are the high risk (a report indicates a failure rate of almost 12% in 2008), the high cost of servicing SBA loans (even with the rebate stimulus plan), and the little known fact that the SBA may terminate the guarantees even after the loan was made.

The reality of obtaining an SBA loan is not as rosy as many startup gurus would have you believe, neither is necessarily better than an entrepreneur. At best, these loans should be a backup plan if cash boot can not be found elsewhere. SBA offers are expensive - even the microcredit interest rates are among at least 8% and 13% - it is time to qualify and boring, and you will be required to support the application with personal guarantee anyway. This means that resources are becoming fair game for the bank, if the company does not work for any reason. Moreover, the chances of approval are much thinner than most people think. Last year, just under 70,000 SBA 7 a loans were funded, most of whom were probably for established companies. The Microloan program distributed more than $ 20M last year, but with a value of the average loan of $ 13,000, only about 1500 small businesses (not all start-up) enjoyed the fruits of this program. In considering these numbers, keep in mind that over 600,000 new businesses with employees were started each year. There are no reliable figures on the number of companies have also launched solo, but estimates say the total is significantly more than 1,000,000 of start-ups each year. Add to that the number of companies seeking capital to grow and expand, and the odds that a start will be financed through an SBA program are rather low.

If you're looking to start your own business, do not make the SBA loan your first choice for startup funding. Determine how much you can get done out-of-pocket and look for investors and family friends to complete the financing. Financing your company and yourself through the people who know you and want you to succeed gives you much more control and can be a stronger incentive to watch the money for the duration of your company. However you decide to finance your business, the first step is to develop a detailed plan, including financial ones, so you know exactly what you need and when. If the total is more than you can fund the work they have put into the planning can be easily organized into a formal business plan to entice investors, including the SBA....