Question: I'm hearing contradictory information about the availability of U.S. Small Business Administration loans and grants. What's the latest scoop?
Answer: The SBA has been instrumental in assisting the formation and growth of small businesses since 1953. The ability to borrow money, often called "access to capital," is a critical component of small business formation and growth. Let's talk about this.
First off, we need to be clear about the "grants" part. There aren't any SBA grants for this purpose. End of discussion.
But the good news is the popular regular SBA lending, known as the 7(a) program, is very much alive and well. Last fiscal year the program made just shy of $11 billion in small business loan guarantees.
Here are the basics of how it works. The SBA doesn't actually loan your business any money. You apply for the loan at a local bank. It does all the analysis and processing, and then submits the loan to the SBA for approval of a guarantee. This means that if the loan goes into default (that is, you don't pay it back in full) then the SBA will pay the bank some portion, typically 75 to 90 percent, of the lost amount. That's a pretty good deal for the bank.
Of course the whole reason this program works is that having the SBA's guarantee induces the bank to make loans which it otherwise probably wouldn't.
Some banks are more equal than others to the SBA. Their "Preferred Lender" designation allows the bank to approve an SBA loan unilaterally. Ask your bank if they have this status. Or, go to the SBA's excellent website (sba.gov).
The SBA and banks use similar criteria to evaluate credit worthiness. You should know a bit about these. The major factors include:
Repayment ability: You need to show that the earnings of the business will cover all business expenses, the loan payment, and an owner's draw for living expenses. This can be shown through historical performance (with credible financial statements) or with cash flow projections in your startup's business plan.
Management: You should be able to show your ability to operate the business successfully. For a start-up, you should have some experience in the type of business you propose to start, and preferably some work experience at a management level.
Equity: The owners must have some of their own money at stake in the business. As a general guide, you will need one dollar of cash or net business assets for each three dollars of the loan request. You will almost certainly be required to pledge non-business assets. This means a lien on your house or other property or collateral. The lender wants you to be "all in" and committed to repaying the loan.
You may hear business people mention getting equity seed capital from "F and F." These are informal sources of startup cash: family and friends. They are called "patient lenders" who realize that they may get little return, or even lose their investment, but are willing to risk it for someone whom they believe in.
Credit History: Your personal and company credit histories will be reviewed. If your credit record has blemishes but there are extenuating circumstances, be ready to explain why. In a future column we'll talk about how to get your credit report and score.
Here's an easy way to find out more about how lenders size up potential borrowers. Google "the five Cs of credit." Then when you meet with your banker you'll be talking the same language.
And last, be aware that SBA loans are not at below-market interest rates. Typical rates are around prime rate plus 3 percent. Expect a loan fee of 1 or 2 percent.
For further information, you can attend a loan briefing session at the SBA Training Center in Seattle. They're held on the 2nd and 4th Thursday of each month, from Noon to 1:00 pm. Preregistration is required. Call 206-553-7310 or email linda.laws@sba.gov.
ABOUT SCORE
To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.
