Where can you go when private financing sources turn you down? For many startup entrepreneurs, the answer is the U.S. Small Business Administration (SBA). The federal government has a vested interest in encouraging the growth of small business. As a result, some SBA loans have less stringent requirements for owner’s equity and collateral than do commercial loans, making the SBA an excellent financing source for startups. In addition, many SBA loans are for smaller sums than most banks are willing to lend.
Of course, that doesn’t mean the SBA is giving money away. In fact, the SBA does not make direct loans; instead, it provides loan guarantees to entrepreneurs, promising the bank to pay back a certain percentage of your loan if you are unable to.
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When seeking an SBA loan, choose your bank carefully. Not all banks are versed in SBA loans, so look for one that is experienced. It could be the difference between terms you can live with and mistakes that could haunt your finances.
Banks participate in the SBA program as regular, certified, or preferred lenders. The SBA can help you prepare your loan package, which you then submit to banks. If the bank approves you, it submits your loan package to the SBA. Applications submitted by regular lenders are reviewed by the SBA in an average of two weeks, certified lender applications are reviewed in three days, and approval through preferred lenders is even faster.
The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, industry experience, or other evidence of management ability, collateral, and owner’s equity contributions. If you own 20 percent or more equity in the business, the SBA asks that you personally guarantee the loan. After all, you can’t ask the government to back you if you’re not willing to back yourself. The SBA offers a wide variety of loan programs for businesses at various stages of development. Here’s a closer look.
7(a) Loan Program
The primary and most flexible SBA loan program is the 7(a) Loan Program. The SBA does not lend money itself, but provides maximum loan guarantees of up to $5 million. If the total loan amount is over $150,000, the SBA guarantees 75 percent of the total; for loans less than $150,000, the guarantee is up to 85 percent. The average loan in 2015 was $374,000. SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. Still, you can expect to pay a one-time guaranty fee, which the agency charges the lender and allows the lender to pass on to you. Fees for smaller loans can be as little as zero percent.
A 7(a) loan can be used for many business purposes, including real estate, expansion, equipment, working capital, and inventory. The money can be paid back over as long as 25 years for real estate and equipment and ten years for working capital. Interest rates vary with the type of loan you apply for.
For Women Only
Women business owners have a friend in Washington: the Office of Women’s Business Ownership (OWBO), part of the SBA. The OWBO coordinates federal efforts that support women entrepreneurs through business training and technical assistance and by providing access to financing, federal contracts, and international trade opportunities.
In addition, the office directs Women’s Business Centers in all 50 states. Women’s Business Centers provide assistance, training, and business counseling through the SBA. For information about OWBO services, call (800) U-ASK-SBA or visit www.sba.gov.
SBA Express Program
A general 7(a) loan may suit your business’ needs best, but the 7(a) Program also offers several specialized loans. One of them, the SBA Express Program, promises quick processing for amounts less than $350,000. SBA Express can get you an answer quickly because approved SBA Express lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50 percent of SBA Express loans.
CAPLines
For businesses that need working capital on a short-term or cyclical basis, the SBA has a collection of revolving and nonrevolving lines of credit called CAPLines. A revolving loan is similar to a credit card, with which you carry a balance that goes up or down, depending on the payments and amounts you borrow. With nonrevolving lines of credit, you borrow a flat amount and pay it off over a set period.
Business 101
Worried your business acumen isn’t as sharp is it could be? Wishing you had taken an accounting class instead of that film history course on John Wayne? Then the Small Business Training Network might be for you.
The Small Business Training Network is an internet-based learning environment—functioning like a virtual campus. As its website says, it offers online courses, workshops, information resources, learning tools, and direct access to electronic counseling and other forms of technical assistance.
The classes run the gamut from how to start your own business—with titles like “Franchising Basics” and “Technology 101”—to how to prepare a loan package, develop employees, and plan for retirement. The workshops are self-paced and usually extremely topical. Some classes were developed within the SBA, while others have been developed by academic institutions. For more information, turn to www.sba.gov/training.
CAPLine loans provide business owners short-term credit with loans that are guaranteed up to $5 million. There are four loan and line-of-credit programs that operate under the CAPLines umbrella:
1. Seasonal line of credit: designed to help businesses during peak seasons, when they face increases in inventory, accounts receivable, and labor costs.
2. Contract line of credit: used to finance labor and material costs involved in carrying out contracts.
3. Builders line program: provides financing for small contractors or developers to construct or rehabilitate residential or commercial property that will be sold to a third party. Loan maturity is generally three years but can be extended up to five years to facilitate the sale of the property.
4. Working capital line of credit: a revolving line of credit (up to $5 million) that provides short-term working capital. Businesses that generally use these lines provide credit to their customers or have inventory as their major asset.
Each of the four credit lines has a maturity of up to five years, although the contract loan program has a limit of ten years, and all can be tailored to the borrower’s needs. Each one also comes with an SBA guarantee of 75 or 85 percent.
Pre-Qualification Program
The SBA’s Pre-Qualification Loan Program helps pre-qualify borrowers in underserved markets, including women business owners. Under the program, with the aid of private intermediary organizations chosen by the SBA, eligible entrepreneurs prepare a business plan and complete a loan application. The intermediary submits the application to the SBA.
If the application is approved, the SBA issues you a pre-qualification letter, which you can take, along with your loan package, to a commercial bank. With the SBA’s guarantee attached, the bank is more likely to approve the loan. Use Figure 15.1 on page 246 to make sure you have all the documents you need.
MicroLoan Program
SBA financing isn’t limited to the 7(a) group of loans. The MicroLoan Program helps entrepreneurs get very small loans (up to $50,000). The average loan in 2016 was for $13,539 with an interest rate that averaged 7.5 percent. The loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies, and working capital, but they cannot be used to pay existing debts or to purchase real estate. This program is unique because it assists borrowers who generally do not meet traditional lenders’ credit standards.
MicroLoans are administered through nonprofit intermediaries. These organizations receive loans from the SBA, then turn around and make loans to entrepreneurs. Small businesses applying for MicroLoan financing may be required to complete some business-skills training before a loan application is considered.
Figure 15.1. SBA Loan Document Checklist
The maximum term for MicroLoans is six years, and the interest rates vary.
Export Expertise
If exporting is part of your business game plan, the Export-Import Bank of the United States (Ex-Im Bank) can be your biggest ally. The Ex-Im Bank is committed to supporting small exporters and provides many financing tools targeted to small businesses, such as working capital guarantees and export credit insurance.
With a working capital guarantee and credit insurance, small businesses can increase sales by entering new markets, expanding their borrowing base and offering buyers financing while carrying less risk. Often, small exporters do not have adequate cash flow or cannot get a loan to fulfill an export sales order. The Ex-Im Bank working capital guarantee assumes 95 percent of the lender’s risk so exporters can access the necessary funds to purchase raw materials or supplies to fulfill an export order.
The export credit insurance protects an exporter from buyer payment default and also allows exporters to extend credit to their international buyers.
To be eligible for the Ex-Im Bank’s programs, U.S. exporters must simply meet the SBA’s definition of a small business, export goods or services produced with more than 50 percent U.S. parts and labor (usually excluding those military in nature), and have export credit sales of less than $7.5 million. Business owners can contact the Ex-Im Bank directly at (800) 565-3946 or through any commercial lender that works with the agency (see the Lender Locator at www.exim.gov). Based in Washington, DC, the Ex-Im Bank also has regional offices in Chicago, Dallas, Detroit, Houston, Miami, Minneapolis, New York City, Orange County (California), San Diego, San Francisco, and Seattle.
CDC/504 Loan Program
On the opposite end of the loan size spectrum is the 504 Loan, which provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. Loans are most often used for growth and expansion. Over $24 billion in 504 Loans were granted in 2016, according to the SBA.
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Looking into exporting? Check out the U.S. Export Assistance Centers. These one-stop shops combine the trade promotion and export finance resources of the SBA, the U.S. Department of Commerce, and the Export-Import Bank. Locate a center at www.export.gov/.
504 Loans are made through Certified Development Companies (CDCs)—nonprofit intermediaries that work with the SBA, banks, and businesses looking for financing. There are CDCs throughout the country, each covering an assigned region.
If you are seeking funds up to $1.5 million to buy or renovate a building or put in some major equipment, consider bringing your business plan and financial statements to a CDC. Typical percentages for this type of package are 50 percent financed by the bank, 40 percent by the CDC, and 10 percent by the business.
In exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or to meet certain public policy goals. Businesses that meet these public policy goals are those whose expansion will contribute to a business district revitalization, such as an empowerment zone, a minority-owned business, an export or manufacturing company, or a company whose expansion will contribute to rural development.
If your business has the goal of job creation, the SBA program will lend up to $5 million for meeting the job creation criteria or a community development goal. Generally, your business must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal, according to the guidelines for the program.
Empowerment Zones/Renewal Communities
Since 1980, the majority of states have established programs to designate enterprise zones, offering tax breaks and other incentives to businesses that locate in certain economically disadvantaged areas. States vary widely in the number of zones designated, incentives offered, and success of the programs. In some areas, businesses may also qualify for lower utility rates or low-interest financing from eligible government jurisdictions. To be eligible for any of these incentives, businesses must generally meet certain criteria, such as creating new jobs in a community.
“Customers aren’t just buying our software; they’re buying a relationship.”
—KATRINA GARNETT, FOUNDER OF CROSSROADS SOFTWARE INC.
If you choose to locate in an enterprise or empowerment zone, look beyond the tax breaks to consider long-term concerns, such as availability of a work force and accessibility of your target market. Make sure the zone offers other support services, such as streamlined licensing and permitting procedures. Most zones that succeed have high development potential to begin with with good highway access, a solid infrastructure, and a trainable labor force.
For more information on enterprise zones, contact your state’s economic development department.
8(a) Business Development Program
The SBA’s 8(a) Program is a small-business set-aside program that allows certified socially and economically disadvantaged companies to enter the federal procurement market as well as the economic mainstream. The 8(a) Program is envisioned as a starter program for socially and economically disadvantaged businesses (that is, firms that are owned and controlled at least 51 percent by socially and economically disadvantaged individuals), which must leave the program after nine years.
Entrepreneurs who participate in the 8(a) Program are eligible for the 7(a) Guaranty Loan and the Pre-Qualification Programs. Businesses must be owned by a socially and economically disadvantaged individual. Socially disadvantaged categories include race and ethnicity. Participants can receive sole-source contracts up to a ceiling of $4 million for goods and services and $6.5 million for manufacturing, according to the SBA. To qualify as economically disadvantaged, the person must have a net worth of less than $250,000, assets under $4 million, and three years’ worth of tax returns that show personal income below $250,000. Most minority groups are part of the socially disadvantaged classification.
Information, Please
Dealing with the federal government has gotten easier, thanks to an online clearinghouse for small business. Instead of contacting dozens of agencies and departments for information on laws and regulations, you can use this one-stop shop to find information on business development, taxes and laws, a variety of workplace concerns, and government procurement loans. You can find the information at www.usa.gov/business.
Export Working Capital Program
If you are planning to export, you should investigate the Export Working Capital Program. This allows a 90 percent guarantee on loans up to $5 million. Loan maturity is one year, and funds can be used for transaction financing. The exports financed must be shipped and titled from the United States. The loans are typically processed quickly.
Special Purpose Loans
If you believe you have a special case that requires extra help, you may be in luck. Of course, keep in mind that everybody believes they deserve extra help with financing, but in many situations, the SBA has a loan program tailor-made for your situation. If you’re starting a business, for instance, that pollutes the environment but you plan to spend additional money to reduce the toxins you’re putting into the air, soil, or water, you may be eligible for a Pollution Control Loan, which is basically a 7(a) loan earmarked for businesses that are planning, designing, or installing a pollution control facility. The facility must prevent, reduce, abate, or control any form of pollution, including recycling.
If your business plans to be active in international trade or your top competition is cheap imports, the International Trade (IT) Loan Program is something you should look into. The SBA can guarantee up to $5 million for fixed-asset financing (facilities and equipment) or refinancing of an existing loan for the same purposes. Working capital cannot be a part of an IT loan.
Numerous variations of the SBA’s basic loan programs are made available to support special needs. So, if you believe your business might fall into a category in which the SBA can funnel additional loans to you, it’s definitely an avenue worth checking out.
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Buying a franchise? Many municipalities and states have financing programs that can underwrite the cost of a franchise. Be aware, however, that the focus of these programs is job creation. To find programs in your area, call the nearest Small Business Development Center or economic development program. It takes a bit of investigating to find the programs, but the results could be well worth the effort.
Making the Most of the SBA
The SBA is more than a source of financing. It can help with many aspects of business startup and growth. The SBA is an excellent place to “get your ducks in a row” before seeking financing. SBA services include free resources to help you with such tasks as writing a business plan and improving your presentation skills—all of which boost your chances of getting a loan.
For more information on other SBA programs, visit the SBA’s website at www.sba.gov, call the SBA’s Answer Desk at (800) 767-0385, or contact your local SBA district office by visiting www.sba.gov/localresources/index.html. Your SBA district office can mail you a startup booklet and a list of lenders and inform you about specialized loans tailored to your industry and where to go for help with your business plan or putting together financial statements.
Granting Wishes
When most people think of grants, they think of money given free to nonprofit organizations. But for-profit companies, and frequently startups, can also win grant money. But how do you find these grants? Unfortunately, locating the right grant is a little like looking for your soul mate. The grant is out there, but you’re going to have to do a lot of looking to find a good match. A good place to start is at your local bookstore. There are a lot of books about getting grants, with titles like Grant Writing for Dummies by Beverly A. Browning, Grantseeker’s Toolkit by Cheryl Carter New and James Quick, and Demystifying Grant Seeking by Larissa Golden Brown and Martin John Brown. And then there’s the bible of grant books—the annual The Grants Register, which lists more than 4,200 grants.
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If you believe your future business could contribute to community development or empower a group of economically disadvantaged people, visit your state economic development office to find out what types of community development grants may be available.
There are other places to look, of course. The most logical place to get an infusion of cash is from Uncle Sam, but you can also win grants from foundations and even some corporations.
Even in the most economically challenged of times, the government is one of the best sources for grants. For instance, the National Institute of Standards and Technology’s Advanced Technology Program offers grants to co-fund “high-risk, high-payoff projects” to provide Americans with a higher standard of living. Whatever the project is, you can bet it will be scrutinized by a board of qualified experts and academia.
The Small Business Innovation Research (SBIR) Program is another government program that gives grants. The SBIR Program specializes in small businesses looking for funding for high-risk technologies. Founded in 1982, the SBIR recently awarded funds for research in advanced metals and chemicals, biotechnology, information technology, and manufacturing. So, if you’re planning on opening a pizzeria, you might have trouble with this one.
But there are federal grants awarded to food and nutrition companies. For instance, a pizzeria that caters to children and specializes in serving nutritious, healthy pizzas may be able to win a grant. You can also check with your state or local government—start with your local or state chamber of commerce.
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Check out www.grants.gov, the website that lists all the federal government’s grant programs. You can find opportunities in categories ranging from arts and humanities to science and technology.
Of course, finding the grant is the easy part; the hard part is getting the grant. It’s a lot like applying for college. You have to jump through the hoops of each organization, which usually involves writing an extensive essay on why you need the money. There are grant-writing businesses that can help you as well as grant brokers—people who try to find the right grant for you. You pay them regardless of whether they find you a grant; on the other hand, if they land you a $750,000 grant, you still only pay them the flat fee, which is generally $40 to $150 an hour, depending on their level of success. But if you don’t have the funds to pay for a grant writer or broker, and you’re a decent writer and have a passion for your business, then start researching, and fill out the forms and compose the essay yourself. There’s no rule that says you can’t try to get a grant on your own. And who knows—you might be successful!