Everybody knows that it takes money to make money, but how do you get the funds to start your business? One place to start looking is the Small Business Administration (SBA). While you won’t borrow money directly from the SBA, you will be directed to a lender who partners with them while the SBA guarantees the loan on your behalf. If you are a relatively new business or don’t have the collateral to guarantee a loan yourself, an SBA backed loan may be what you need. Bob Nelson and Kerrie Hurd, the district directors of the Massachusetts and Seattle, WA offices, respectively, discuss different lending options the SBA provides.
The 7(a) Loan
Many people who qualify for an SBA loan use it because they lack the collateral to qualify for a typical bank loan. To be eligible for a 7(a) loan, which may be used for real estate purchases, working capital, equipment and inventory purchases, and other business needs, you simply need to be a small business with a demonstrated need for a business loan. You should also be up to date on any current loans owed to the US government.
Many people want to know if they are considered a small business by SBA standards. “In most markets across the country, 95%-98% of the businesses are considered small by SBA size standards, so don’t let size be something that is going to hold you back from talking about an SBA loan with your lender,” says Bob. The SBA guarantees 7(a) loans up to 75%-85%, which makes it less of a risk for lenders and more accessible for borrowers.
The 504 Loan
Leasing property where you may operate your business can be a major investment on your part. Instead of continually paying rent on the real estate, why not put the money towards ownership, instead. A 504 loan can help you do that. You must go through a 504 Certified Development Company (504 CDC), which is an organization that helps facilitate the loan. “They work with what we call the third-party lender on putting together the project in the whole transaction,” explains Bob. Both the CDC and the third-party lender service the loan while the SBA guarantees it. “It really makes sense to have two lenders where we reduce the risk of one lender to 50%, but then the rest of that loan is fixed with a lender that is actually a partner to the SBA,” says Kerrie. If you sell your business in the future, you get to keep the equity that has accumulated in the property. This a nice incentive to take into account when considering your financing options for real estate.
Microloans are geared to borrowers who may not be ready to acquire a traditional bank loan. Since most banks would not be willing to take on the risk of lending to these borrowers, microloan intermediaries provide that service. Microloan intermediaries are mission-driven organizations that receive loans from the SBA in order to lend money to typically underserved businesses. The maximum loan amount is $50,000, but many loans dispersed range from $10-$15,000, which may be a perfect option for microenterprises.
The services provided by the intermediaries don’t stop after they lend the funds. They also provide technical assistance. “We need to make sure that small businesses have the knowledge and skills to successfully run a small business, and that’s the component of everything we do,” says Kerrie. The guidance the intermediaries provide make sure that small business owners are ready to successfully start and run their businesses. “They kind of act as that board of directors for the small business, guiding them, asking them those tough questions, making sure they’re on track,” Kerrie says.
This is just a brief overview of the funding services the SBA provides. Check out the webinar Securing Capital for Your Small Business facilitated by Bob Nelson and Kerrie Hurd on our website westchester.score.org to learn more.