Sba Financing Guide For Entrepreneurs



Know what you're getting into before you start the process.
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If you’re looking for financing for your business, loans backed by the Small Business Administration (SBA) can be a good place to start. However, it can be daunting with so many different types of SBA loans. It’s worth it to dive into the details of each program in order to understand what program and lender are right for you.

  1. If the terms of the leasing company do not fit your criteria, you can seek equipment financing from several other sources including banks, credit unions, online lenders, and even the SBA depending.
  2. An Entrepreneur's Guide to SBA Loan Programs Lender Financing/Financing a Business, Managing a Business, Starting a Business Submitted by Anonymous on Wed, 2014-07-16 11:45.

In this article, we’ll cover the basics you can take action on now to improve your chances of qualifying for funding through an SBA-approved lender.

1. Improve your personal credit scores

According to the SBA website, even individuals with bad credit may qualify for funding. Having great credit scores, however, will significantly increase your chances of approval. Remember that SBA-approved lenders can add certain qualification requirements to the SBA loans they distribute, which often means more strict credit requirements for borrowers.

Related: SBA Loans — A Primer

Get started by reviewing your credit scores and reports (here’s a list of more than 130 places to get your scores for free). There are three major credit reporting agencies, so be sure to understand which agency's score you’re looking at when reviewing your credit data, and be mindful that your scores can vary based on the scoring model used.

Your credit score often comes with a list of reasons why you didn’t achieve a perfect score, such as having an imbalance of types of credit, paying a bill late or having a delinquency on your account. No matter what your scores are, you can take these measures to boost them:

Starting a business from scratch can be challenging. Franchising or buying an existing business can simplify the initial planning process.

  • Pay your bills on time. (This is huge.)

  • Keep balances low. You may want to consider paying down some of your debt early so that when your balances are reported to credit bureaus, it’s reported that you have little to no debt usage.

  • Make sure your report is error-free. If you do find errors, you can dispute them with the credit bureaus reporting the error.

  • Take care of any reported collections accounts. Try contacting the collection agency to discuss payment options and to see if they’re willing to stop reporting the account to credit reporting agencies.

  • Open a new credit card, or ask an existing credit-card issuer you work with to increase your limit. This can lower your debt-usage ratio, often resulting in higher scores.

If you have blemishes on your reports that you can’t take care of now, be prepared to discuss these with your lender.

2. Establish credit scores for your business.

SBA lenders want to know that your business can repay its debts, and do it on time. Your business credit may be part of this evaluation. In fact, the FICO LiquidCredit Small Business Scoring Service (FICO SBSS) is a business credit score used by the SBA to pre-screen applicants to its 7(a) loan program for loan amounts up to $350,000.

This score can evaluate personal credit data for all owners with ownership of greater than 20 percent, as well as the business-credit data of the business itself. It may even include financial data for the business. Applicants who fail to meet the minimum score requirement may find it more difficult to get approved. (The SBA minimum FICO SBSS score is 140, and many lenders want to see a score of 160-165 or above.)

3. Make sure you meet the size standards for an SBA loan

The SBA has pretty strict definitions of what does and does not count as a small business. They’ve accordingly developed a size standard — which is generally calculated by your number of employees or how much your company makes annually — but which varies by industry.

You can figure out how to calculate your small small business size here. Make sure you follow the SBA’s other general requirements, including:

  • For-profit company.

  • U.S.-based operations.

  • SBA-approved industry (see here for more information).

4. Invest what you can into your business.

SBA lenders want to know that you’ve put money into your business, because it’s one of the strongest signs that you really believe in its potential. The less you invest, the less a lender will be willing to invest.

5. Prepare or update your business financial statements.

A lender will likely want to look at your profit and loss statement, or P&L, as well as your projected financial statements.

6. Make sure all owners have updated personal resumes.

A bank or lender will likely want to see your business experience. For startups, they’re looking to see if you have experience in an industry or line of business that closely relates to the one your new business operates in. If none of the owners have experience in the field, consider involving someone that does.

Related: How to Choose the Best Small Business Loan

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7. Determine how you’ll use the loan.

Will you be using the loan as working capital, or do you need it for a specific project such as purchasing fixed assets like equipment and supplies? Your lenders will want to see that you have an actual plan for the money you’re seeking.

I’ve gotten 30 different types of loans over the course of my career, ranging from equipment loans to SBA loans. It wasn’t easy getting my credit in good shape, and the process of applying for the loans themselves was often complicated and frustrating.

I can also say that every single one of those loans was instrumental in helping me grow four businesses. SBA loans, in particular, feature some of the most generous terms available. It can take a while to get approved for one, however, so be sure to start the ball rolling well before you need it.

The SBA offers a variety of loan programs to fit every stage of business development.

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 actually 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.

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) Guaranty Loan Program
The primary and the 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 or 75 percent of the total loan amount, whichever is less. For loans that are less than $150,000, the maximum guarantee is 85 percent of the total loan amount. 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.

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 10 years for working capital. Interest rates vary with the type of loan you apply for.

SBAExpress Program
A general 7(a) loan may suit your business's needs best, but the 7(a) program also offers several specialized loans. One of them, the SBAExpress Program, promises quick processing for amounts less than $350,000. SBA Express can get you an answer quickly because approved SBAExpress 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 SBAExpress 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 of time.

CAPLine loans provide business owners short-term credit, with loans that are guaranteed up to $2 million. There are five 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. Standard asset-based line of credit: helps businesses unable to meet credit qualifications associated with long-term credit; provides financing for cyclical, growth, recurring or short-term needs

4. Small asset-based revolving line of credit: provides smaller, asset-based lines of credit (up to $200,000), with requirements that are not as strict as the standard asset-based program

5. Builder's line of credit: used to finance labor and materials costs for small general contractors and builders who are constructing or renovating commercial or residential buildings

Each of the five credit lines has a maturity of up to five years but can be tailored to the borrower's needs.

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 $35,000. 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 and 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.

Sba Financing Guide For Entrepreneurs Association

The maximum term for MicroLoans is six years, and the interest rates vary.

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.

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 $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.

HubZone Program
Since 1980, 40 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.

The HubZone Program was set up to provide tax incentives and stimulate community investment and development. Specified urban and rural communities will receive grants and tax breaks for businesses in the area. The federal government's involvement means entrepreneurs in those areas can get federal tax breaks, not just state.

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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 or call HUD's Office of Community Renewal at (202) 708-6339.

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 minority businesses, 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. To qualify as economically disadvantaged, the person must have a net worth of less than $250,000 as well as two years' worth of tax returns.

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 $2 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.

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 $1.75 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.

Sba Financing Guide For Entrepreneurs Students

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.

Sba Financing Guide For Entrepreneurship

This article is an edited excerpt from 'Start Your Own Business, Fifth Edition', published by Entrepreneur Press.