As a new entrepreneur looking for capital, one of your first options will be the SBA, or to be exact, asking for a SBA guaranteed loan. SBA loan applications are made through a bank. In broad terms, the SBA guarantees a loan to the bank, so in case the borrower defaults, the bank is guaranteed a portion of the loan by the SBA. (You are still liable for the loan, so your obligation does not go away.)
This makes it easier for banks to lend to budding entrepreneurs, but it does not mean that the bank can just lend indiscriminately. The bank will analyze the application to protect its interest as well as the SBA’s.
The SBA does not lend directly to the business owner. It is important that the bank you are working with is knowledgeable about SBA loans, as it will initially process your application, not the SBA. The SBA will review the application once the bank approves it.
Two of the most popular loan programs that the SBA offers are :
-SBA Express and 7(a) loan program
These are the most common loans offered to small businesses. These programs are available through qualified lenders. Most banks and non-bank lenders offer these types of loans, but some are much better than others with SBA loans. Because these programs are offered through a non-bank lender or bank, if the institution does not want to extend this offer to the client (even if the client qualifies for the loan under the basic SBA 7(a) standard) the SBA cannot force the lender to give the loan to the customer. These loans can be either term loans or lines of credit.
Lenders structure the loans based on SBA-guarantee standards. The lender provides the funds to the borrower, while the SBA guarantees a portion of the loan to the bank; both institutions share the risk on the loan.
The SBA does not lend money, the bank does. Lenders evaluate whether they can do the loan themselves, or use the SBA guarantee if the application has weaknesses. Most banks like to see that the business has been in operation for at least two years before it will grant a commercial loan.)
Certified Development Company (CDC) 504 Loan Program -504 Program
The 504 Loan Program provides financing for long-term major fixed assets at a fixed rate. It is offered through a Certified Development Company (CDC). A CDC is a non-profit corporation that works with the SBA and private lenders to provide capital for small entrepreneurs.
The deals have the following structure: a private lender with a senior lien on the property funds 50%; the CDC (backed by the SBA) funds 40% with a junior lien, and the entrepreneur funds 10%.
The SBA also offers special-purpose loans, although these are much less common and harder to get. Please check the SBA Web site (http://www.sba.gov) for more information on any of the aforementioned programs.