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The truth
about SBA loans
Dear Small Biz
Adviser:
Where do I look for information on an SBA loan?
Sheri
Dear Sheri:
Normally, a question like this only requires a link to the Small
Business Administration's Web site. However, I want to take
the opportunity to address some important points about the SBA and
eliminate some misconceptions many small-business owners have about
that agency.
The SBA has a massive online site with useful information
to small-business owners. It includes:
But even after reviewing all this valuable new-business
information, many still have several misconceptions about the SBA.
No free money
Let's begin with the issue of grants. Contrary to popular opinion,
the SBA is not in the business of giving out "free money."
Grants do
exist, but there are clear limitations and restrictions on who qualifies
and what is expected in return for grant proceeds. You will also
find a large number of these grants are limited to nonprofit groups,
such as community development corporations.
A second misconception is that the SBA actually distributes
loan proceeds. There were times in the past when that was the case.
Under the Direct Loan Program, the SBA directly issued loan proceeds
to qualified applicants whose loan applications were rejected by
three commercial lenders. There also used to be direct loans for
veterans and, more recently, the physically challenged. Direct-loan
programs no longer exist.
The SBA provides guarantees to qualified
commercial lenders against approved loans that fall into default.
Depending on the specific loan program and use of funds, the guarantee
is for between 70 percent and 90 percent of the loan proceeds.
The most popular of these programs is the 7(a)
loan guaranty. However, there are concerns about 7(a) in the
banking and small-business communities. The ceiling on total guarantees
for the coming fiscal year was reduced 50 percent. In short, small
businesses will be in greater competition with each other for less
funding.
A third major misconception is that SBA loans are
directed to higher-risk small-business loan applications and that
the SBA especially targets startups for loan assistance. That is
simply not true.
To begin, the qualified commercial lenders decide
which applications to submit to the SBA for consideration of guarantees.
And commercial lenders are not going to submit what they consider
to be high-risk applications to the SBA because commercial lenders
simply do not consider high-risk applicants. They leave that type
of proposal to the venture
capital market or applicants' family, friends, personal resources
or potential partners.
Loans submitted to the SBA for approval do have some
limited degree of risk not normally acceptable to standard bank
policy, but the individual institution decides that.
Startup money hard to find
As for startups, Sheri, I am sorry to tell you that very few such
applications are considered by a traditional commercial lender.
I have been involved in small-business development dating
back to 1983, counseling in excess of 2,000 clients in that period.
On only one occasion did I witness the approval of a loan to a startup.
That is not to say the SBA never supports startups.
It subsidizes major programs (SBDC, SCORE, WBC, etc.) that incorporate
startup assistance into their mission statements, goals and objectives.
But the reality is that funding startups is a high-risk situation.
Education, mentoring, workshops and other support services are the
best that can be done at this time.
So the SBA is absolutely one of the very best programs
founded and maintained by the federal government, and there is much
to be accessed through it, but don't rely on that agency for your
capital needs. And don't believe it will be a cure-all to avoiding
risk.
I hope this has been informative to your needs. I
wish you well.
-- Posted: Aug. 22, 2002
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