Join Rudolph Rosenberg for an in-depth discussion in this video Getting loans from the Small Business Administration (SBA), part of Entrepreneurship: Raising Startup Capital.
- The Small Business Administration is a government entity whose purpose is to help small businesses to grow and thrive. One of their activities is to help small businesses get loans. People usually refer to it as SBA loans but that's not exactly how it works. The SBA does not lend money per se to small businesses. It rather provides guarantees to financial institutions so as to reduce their risk and facilitate small businesses' access to loans.
The way it works is that if your company is eligible, the SBA will take responsibility for a large portion of your loan and if your company cannot pay it anymore the SBA will pay back the amount on which you took responsibility. In some cases, each responsibility can go up to 80 percent of the loan, which is very high. That means that when a bank evaluates a loan for a company that is eligible for SBA-backed loans then the risk the bank is taking is really on only 20 percent of the total amount.
In concrete terms, if you borrow 100,000 dollars from a bank, and the SBA guarantees 80 percent of it, that means the bank will be able to get back up to 80,000 dollars from the SBA, if you default, and its risk is therefore on only 20,000 dollars out of the total loan. In essence, for the bank, then it is as if they were considering giving you a much smaller loan and it becomes, therefore, much easier for your company to get it.
Of course, since the SBA is a governmental entity and is putting taxpayer money at risk, it is requiring a lot of information before it decides to back your loan. It can therefore be administratively intensive for an entrepreneur. Some of the requirements to be eligible are to be working for profit, to have looked for other sources of money before turning to the SBA, including using your own personal money for at least 10 percent of the amount you are requesting, to present a business plan and financial projection in order to articulate why you need the capital, to have no debt obligation towards the US government, and for them to be able to take back the equipment you bought with the loan if necessary to recover as much money as possible if you default.
There are other requirements, and you can find all the details on the SBA website at SBA.gov. Those, I think, are all very valid requirements necessary to ensure that the taxpayer money is well-managed. The second area the SBA is active on in relation with our topic here is the SBIC, or the Small Business Investment Corporations. The SBICs are private organizations that are regulated by the SBA.
They invest in businesses and usually focus on specialized areas. For example, on companies that have a socially or economically disadvantaged ownership. To know more about SBA loans, the best next step is to go to the SBA.gov website, which is very well-designed. You will find information on things like the 7(a) programs or the 504 programs and the SBIC programs. Those are the programs we have just described, and since they change regularly that's the best way to get fresh information.
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