The U.S. Small Business Administration (SBA) can be a huge financial resource for entrepreneurs unable to secure financing through other means. Last year alone, the agency's two main lending programs backed nearly $29 billion in loans supporting 600,000 jobs.
Too often, however, lack of awareness prevents small businesses from taking full advantage of the SBA. That's a shame, because the SBA's lending programs can help you grow your business—from startup funds to brick-and-mortar expansion to microloans for inexperienced entrepreneurs. Here's a simple guide to how SBA financing can help you succeed.
Starting your business
The SBA provides financial backing for startup companies through its 7(a) general business loans program, named after the section of the Small Business Act that authorizes the loans. As with all of its lending programs, the SBA doesn't provide loans directly to borrowers. Instead, it offers credit insurance to private lenders, guaranteeing up to 85 percent of loans that recipients can use for any legitimate business purpose, including equipment financing, real estate and buying another business.
The loans—which can be as large $5 million—are a critical source of seed funding for businesses, says Charles Green, a former banker and the author of The SBA Loan Book. “Startup financing is difficult to do, and that's why the program has been so important," he says. “It acts as a backstop for banks entering into transactions that typically might be outside of their credit policies."
Banks are the main originator of these loans, but the SBA wants to widen the ranks. In February, the SBA and the National Credit Union Administration announced a partnership to expand credit unions ability to offer these kinds of loans. “Millions of Americans have used their credit union to finance their car, home or children's education," said SBA administrator Maria Contreras-Sweet in the Feb. 6 press release. “We want to empower credit unions to finance small business startups, too."
Expansion and modernization
If you're looking to expand your business, the SBA's CDC/504 program could help. A long-term SBA financing tool, the 504 program supports capital asset financing for the purchase of land, buildings and equipment installation.
Small businesses can receive the loans from 270 SBA-authorized certified development corporations, or CDCs, covering specific regions of the country. To be eligible, your business generally must create or retain one job per $65,000 received through the program.
The SBA is looking to double the volume of loans supported through its microloan program. A nationwide network of nonprofit lenders administers these loans of up to $50,000, which are ideal for fledgling entrepreneurs with no or limited credit histories. Recipients can use the money for machinery, working capital, furniture and inventory, among other things.
To find lenders participating in these programs, contact the SBA district office near you.