SBA Funding

Question: I heard the SBA is a source of start-up funding. Can you explain what is available and how to apply?

Answer: Most business owners consider SBA the most affordable option available. The loans are guaranteed by the SBA and they are noted for reasonable monthly payments and low-interest rates. The SBA does not loan funds. They set the guidelines that are made by its partners which include lenders, community development organizations and micro-lending institutions. The guarantees reduce much of the risk for the lenders.

If you have access to reasonable term financing, you may not be eligible for an SBA-backed loan. But for those that don’t have a source of funding, there are four loan programs available:

7(a) Loan Programs: The most basic, flexible and most commonly used type of loan. The money can be used for a variety of general business purposes: working capital, machinery and equipment, furniture and fixtures, purchasing and renovating land and buildings, leasehold improvements and debt refinancing. Loan maturity: 10 years for working capital and up to 25 years for fixed assets. The application can be made through participating lending institutions.

MicroLoan Program: Offers very small loans to startups, newly established or growing small business enterprises. The loan proceeds can be used for capital for the purchase of inventory, supplies, furniture, fixtures, machinery or equipment. The funds are available through designated intermediary lenders, who are nonprofit organizations experience in lending and technical assistance. Loans are made up to $50,000 with an average of $13,000. Loans cannot be used to existing debts or purchase real estate.

CDC/504 Loan Program: Long-term fixed rate financing for major assets, like land and buildings, machinery, construction to renovate facilities, or refinance debt in conjunction with the expansion of business. The 504 loans cannot be used for working capital or inventory. 504 loans are typically structured with the SBA providing 40% of the total project costs, a participating lender providing 50% and the entrepreneur putting up the remaining 10 percent. To qualify, the borrower’s must have a tangible net worth of less than $15 million and an average net income of $5 million or less after federal taxes for the two years before the application for the loan program. The maximum amount loaned is $5 million.

Disaster Loans: The SBA also offers a fourth option for businesses that have been affected by a declared disaster. Low-interest loans can be used for repair or replacement of damaged real estate, personal property, machinery, equipment inventory or business assets.

What you need to apply: Personal background & financial statements, business overview and history, business financial statements (P&L, projected P&L, IRS returns), Ownership and affiliations, business certificates/licenses, loan application history, resumes of key personnel, leases.

Questions you need to be prepared to answer: Why are you applying for this loan? How will the proceeds be used? What assets need to be purchased and who will be the suppliers? What other business debt do you have and who are your creditors? Who are the members of your management team?

Another tip: Bring a business plan with you to share your concept of your business. It is the roadmap for your business and will show the lender you have a vision, direction, objectives and strategies for achieving your business objectives. Check in with SCORE to get help with your business plan development.

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