How to Get an SBA Loan

The U.S. Small Business Administration offers a variety of loan programs for small businesses but there are two main points to keep in mind if your business is considering pursuing one: First, the SBA does not directly make loans; that's the job of financial institutions. Second, SBA-backed loans should be seen neither as a first recourse or a last resort, bizjournals reported.

"The SBA guarantees loans - it doesn't actually lend money," said Carol Kuc, president of the National Association of Women Business Owners. "So it's important to develop a relationship with a banker - one that makes SBA-backed loans."

Most banks do, and the SBA's website, www.sba.gov, includes a list of participating lenders.

Before applying for an SBA-backed loan, small businesses are advised to seek a conventional bank loan - they're cheaper.

"SBA programs can be an excellent source of funds, especially if you lack collateral or established earnings," said Jim Overton, director of SBA 504 lending at Self Help. "But the rate tends to be a little higher than a conventional loan. You are paying a fee for that guarantee. If you are creditworthy, an SBA-backed loan does not necessarily offer the best terms and conditions you can get."

Self Help is a North Carolina-based community development financial institution that serves businesses across the country. Jim Hammersley, director of the SBA's Office of Business Loans, said borrowers may be able to get a longer term for an SBA-backed loan - as long as seven to 10 years - which would lower monthly payments. Paying off an SBA loan will enhance the creditworthiness of a small business with commercial bankers, making future borrowing easier, he added.

Although the loan is backed by the SBA, the borrower is still responsible for it. Said Kuc, "This is not free money. A loan is a loan, and you have to repay it."

Hammersley also suggested spending lots of time exploring the SBA Web site. It not only provides in-depth information on the SBA and the services it offers, but is also a primer on how to begin and grow a business, and lists resources.

The site can steer a borrower through loan options. For example, if you are looking to finance the construction of a building, a 504 loan is appropriate, while the 7(a) program is geared toward the purchase of computers, phone systems or other equipment.

The SBA also has a Microloan program, which provides small loans. Under this program, SBA makes funds available to nonprofit community-based lenders that make loans of up to $35,000. The intermediary provides technical assistance, which, Hammersley said, can be just as valuable to a young company as a loan.

You can also get assistance from local SBA-affiliated small business centers and women's business centers or from the volunteers at SCORE, which is staffed by retired business executives. A community college, public library, chamber of commerce or local government agency may also be able to provide resources and technical assistance.

"The website can steer you through the process, but it doesn't tell you how to make the deal work or build relationships for you," Kuc explained. "You have to do that yourself."

Don't think that if no one else will lend you money, you can get it through SBA programs. The SBA and its lenders are not going to make loans to excessively risky businesses and those that lack solid business plans. "Show them -- why are you good candidate for a loan?" Kuc advised.

A well thought-out business plan with reasonable projections is a must. Said Overton: "A plan won't make or break your application, but without one that shows how you intend to succeed, it will hurt your chances. The more data you have, the more you show you understand your business, how you will make it work and have relevant experience, the better your chances are."

Also be prepared with your personal tax returns and financial statements, as well as your company's financials.

"The most important thing to do - by a long shot - to get an SBA-backed loan is to have a well thought-out business plan," Hammersley said. "And do your homework to see what's available. Plus pay attention to the details - understand the transaction."