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Say Uncle: Get federal help for your small business

Government assistance for small businessesUncle Sam is often a misunderstood relative. As a member of the federal family, he frequently takes heat for government programs his nieces and nephews outside Washington, D.C., view as wasteful.

But as a representative of the U.S. Small Business Administration, Uncle Sam just might be the best kin an entrepreneur can have.

Financial assistance is the first thing that comes to mind when the SBA is mentioned. While it's true the agency offers various ways to help bankroll small companies, the SBA also offers other types of critical business assistance, much of it free.

Here's a look at various SBA programs and how they can help your company grow and prosper.

Funding your business
Since its inception in 1953, the SBA has been a primary backer of small companies seeking capital. Through its various loan programs, the agency has lent $180.17 billion to small businesses under its 7(a), 504 and Microloan programs. Household names, and now big businesses, such as Apple Computers, Outback Steakhouse, Nike, Staples and Federal Express have received loans or venture capital thanks to the SBA.

The SBA's main loan programs are:

  • 7(a) Loan: This loan program, designed to help businesses that ordinarily would not be eligible for banks loans, is probably the best known of all SBA lending options. With it, ventures get the financing they need by having the SBA guarantee the loan. The trick with SBA-guaranteed loans is to find a lender who has a lot of experience with the 7(a) program and who can help the small-business owner run through the money maze. The maximum loan amount under the program is $2 million, but most loans are smaller, since the SBA can only guarantee up to $1 million. (Banks that opt to loan more than the SBA limit issue the funds at their own risk.) The biggest complaint about the 7(a) program is that small-business borrowers must pledge both business and personal assets. The SBA also requires personal guaranties from company principals.

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  • SBAExpress Loan: This program makes it easier and faster for lenders to provide small-business loans of $150,000 or less. Lenders can use their own forms to process loans, which are then guaranteed by the SBA. Loans are approved or rejected within 36 hours of receipt. While the SBA requires guaranteed loans to be fully secured, under SBAExpress lenders may approve unsecured credit lines up to $25,000. Loans mature within five to 10 years and up to 25 years for fixed-asset loans.

  • Microloan: These mini loans are for startup or emerging businesses. The SBA gives funds to nonprofit community-based lenders who make the actual loan and decide who gets the money. A maximum of $35,000 can be borrowed, but the average loan size is $10,500. The maximum term for a microloan is six years. However, terms vary by loan size, planned use, requirements of the intermediary lender and the needs of the borrower. Interest rates also vary depending on the lender. Like other loans, microloans require collateral and the personal guarantee of the business owner.

  • Certified Development Company (504) Loan: The 504 Certified Development Company Program grants long-term, fixed-rate loans to growing businesses for purchasing land, buildings, constructing parking lots and landscaping, construction of new facilities or modernizing old ones. Loans can also be granted for purchasing machinery, equipment and other "major fixed assets." Designed to foster economic development and job creation in local communities by assisting small businesses, 504 loans are made through Certified Development Companies, nonprofit corporations that foster grassroots economic development. The approximately 270 CDCs located nationwide work with the SBA and private-sector lenders to provide financing.

The SBA also offers CommunityExpress, a pilot loan program similar to SBAExpress, but which focuses primarily on low- and moderate-income areas. In general, companies must have at least $2.5 million in annual revenues to be eligible. The maximum loan amount is $250,000 and the standard SBA 7(a) guarantee applies. Loans mature in five to 10 years and up to 25 years for fixed-asset loans. Length of payback depends on what the money is used for and the borrower's ability to repay. The lender and borrower negotiate the interest rate, which is capped at 2.25 percent over prime for loans of less than seven years, or 2.75 percent over prime for loans of seven years or more.

And CommunityExpress provides more than money. Loan recipients receive technical and management assistance and advice "designed to help increase the loan applicant's chances of success," according to the SBA.

Quicker cash
Do you need a short-term loan or line of credit to meet cyclical working-capital needs? Check out the five types of credit lines offered by the SBA's CAPLines program:

1. Seasonal, which is advanced against anticipated inventory and accounts receivable to help out during peak seasons;

2. Contract line, which finances labor and material cost for assignable contracts;

3. Builders line for members of the construction industry;

4. Standard asset-based line for companies that can't meet credit standards for long-term credit; and

5. Small asset-based line, an asset-based revolving line of credit for up to $200,000. It works like a standard asset-based credit line except that some of the stricter requirements are waived if the business can show repayment ability from cash flow for the full amount.

In general, the total loan amount available under CAPLines is $1.33 million. Each of the five lines of credit mature up to five years. Interest rates are negotiated between the borrower and the lender and are subject to SBA maximums that are pegged to the prime rate.

Federal venture and angel capital
Uncle Sam also is a venture capitalist. Well, actually, he is the funder of venture capital firms, called Small Business Investment Companies.

Congress created the SBIC program in 1958 to give small businesses access to equity financing. SBICs are licensed and regulated by the SBA, but are privately owned and managed. They use their own capital, plus funds borrowed at favorable rates with a SBA guarantee, to make venture capital investments in small companies. The SBA requires a minimum private capital investment of $5 million or $10 million if the SBIC intends to use participating securities.

A minimum of 30 percent of this capital must come from sources unaffiliated with the SBIC. According to the SBA, tax revenue generated each year from successful SBIC investments more than covers the costs of the program. Through the SBIC program, the SBA has provided $32.77 billion in venture capital to small businesses.

Looking for an angel investor? Then point your computer mouse to the SBA's Angel Capital Electronic Network. Here, small businesses can be listed online and matched up with investors. The Web page currently boasts listings of almost 400 active investors and more than 300 entrepreneurs. The ACE-Net site, developed by University of New Hampshire, reports that the program has helped entrepreneurs secure more than $4 billion in four years.

More than money
Although the SBA is probably best known for guaranteeing loans, it offers a lot of confidential and free advice for small businesses. Workshops also are provided, with minimal or no registration fees. The services most often are used by startups, but the agency welcomes small-company owners at any stage of a firm's development.

Small Business Development Centers have been helping small companies for more than 20 years. SBDCs assist people who wish to start or expand a business. They provide advice and mentoring on a wide range of business concerns, including guidance on finances, marketing and organization. More than 500,000 companies get help from SBDCs on an annual basis (635,000 in fiscal 2001), on topics such as how to write a business plan or how to launch a new product.

Counselors with the Service Corps of Retired Executives offer free advice and mentoring to small business owners. As the program's name implies, SCORE advisers are primarily retired top managers. SCORE helps around 300,000 small businesses annually, with more than 4.5 million small-business owners served since its 1964 inception. The program presents more than 5,000 training workshops each year. SCORE even offers e-mail counseling via its Web site.

Business Information Centers provide cutting-edge computers, graphic workstations and other technology, so small businesses can access market research databases, planning software, spreadsheets and a vast library of information.

Women's Business Centers provide assistance and training for female-run ventures. Help can be found on financing, management, marketing and the Internet, as well as specialized topics such as home-based businesses, corporate executive downsizing and welfare-to-work.

If you don't live near an SBA counseling facility, then get help electronically. In addition to the SCORE e-mail advice program, the SBA provides online business education through its Small Business Classroom. This cyber-training and educational resource lets small-business owners take classes or perform research. Current courses, several in conjunction with private-sector partners, include "How to Start a Business," "How to Raise Capital for a Small Business" and "Growing Your Business on the Web."

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: July 3, 2002

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