If you think that you can turn to the Small Business Administration (SBA) for a direct loan, then think again. Although the SBA does lend money, there are many restrictions in place that will rule out many businesses. Certainly, if you qualify, you may be able to obtain a micro loan for up to $50,000. However, you have a much better chance of turning to a commercial bank where certain business loans are backed by the SBA, but issued by the bank.
Types of Loans
Your commercial bank determines what types of small business loans to offer. When SBA backing is provided, your bank will follow certain guidelines when issuing such loans. The bank must follow those guidelines to have your loan secured by the SBA. If you default on the loan, then the SBA will step in, provided the loan adhered to its standards.
Banks operate as partners to the SBA by providing an assortment of loans, including the micro loans mentioned earlier. With the SBA operating as a guarantor, banks are more willing to lend money, knowing that they will be repaid. Essentially, the SBA acts as a co-signer, an important signatory that banks need when lending money to some businesses.
Consider this point: small businesses represent one of the riskiest endeavors with more than half failing after five years of business. Those risks are too high for most banks to assume alone. With the SBA standing behind the loan, the risk that the loan won’t be repaid is greatly reduced, if not eliminated entirely.
To obtain an SBA-backed loan, you need to get qualified first. That qualification has an interesting twist to it, one that takes some borrowers by surprise. Specifically, to qualify for a small business loan, you must be turned down for private financing.
Yes, that rejected loan application is actually a good thing. It means that you aren’t able to secure funding and that your back is essentially to the wall. In other words, Uncle Sam is ready to come to the rescue!
The size of your business matters to the SBA. No business with more than 500 employees can qualify for an SBA-backed loan. Thus, the definition of a small business depends largely on the number of employees you have.
Even so, those size requirements can vary by industry. A number you have in mind for one business type may not be sufficient for another business type. Visit the SBA website to make a determination for your business.
Don’t think for a moment that the SBA plays fast and loose with the rules to qualify borrowers. You still need to meet your banker’s criteria to secure a loan. Yes, the SBA has its own qualifications, but the bank’s qualifications are typically higher.
The reason for the strict requirements is that the SBA identifies some banks as preferred lenders or entities that have a leg up in securing SBA backing. This preferential status ensures that banks will only write loans to people qualified to borrow money. Banks want the SBA’s business, but they aren’t willing to risk it by underwriting a bunch of bad loans.
There is more to SBA-backed lending then can be mentioned here for the simple reason that the lending requirements can change without notice. You should also know that if your business is failing, the likelihood that it will receive a loan of any kind is nil. Meet with your small business bank advisor to find out if you qualify for a loan and if that loan will be backed by the full faith and credit of the federal government.
See Also — Novars Group Business Alliance