SBA Loan Funding

Congress has passed a bill that will enable to the Small Business Administration (BSA) to increase the annual limit on the loans it guarantees by 15 percent to help small businesses secure financing. The change applies to the federal agency’s popular 7(a) loan program. President Trump must sign the bill in order for it to become law.

Before the new legislation was passed, the SBA was required to get permission from Congress to raise the ceiling on SBA loans, which stands at $27.5 billion for the fiscal year ending Sept. 30.

One of the main priorities of the SBA is to help entrepreneurs secure the capital they require to launch and grow their companies. The agency does this by providing loan guarantees against default. In this way, the SBA mitigates the exposure to risk for lenders, which thereby provides incentive for them to provide funding to businesses that might not otherwise qualify for a loan. The borrowers often are not in a strong enough financial position to secure a traditional bank loan. Thus, the SBA’s government-backed guarantee helps spur lending.

Since it was established by the Eisenhower Administration in 1953, the Small Business Administration has overseen 20 million loans for entrepreneurs all across the country. The agency does not make loans directly. Rather, SBA loans are offered through the agency’s approved financial institution partners.

SBA 7(a) loans can be used for a wide variety of purposes, including starting a new venture or funding an acquisition of an existing one. SBA financing can also be used for working capital, the purchase of owner-occupied real estate, franchise financing, inventory, debt refinancing, equipment, and improvements and renovations. Small business owners can borrow up to $5 million through the SBA’s 7(a) Loan Program.

SBA funding is popular among entrepreneurs because they come with reasonably low interest rates (currently between 7 and 10 percent) and long payback terms. However, because of the government’s involvement, the application process for SBA funding takes a longer amount of time than other types of loans.

The SBA also offers its 504/Certified Development Company (CDC) Loan Program that provides funding to small business owners for the purchase of major fixed assets, including land or buildings. The 504 program also covers major construction or renovation of buildings and the purchase of major pieces of equipment, such as machinery, trucks, and other big ticket items. Loans under this program range from $125,000 up to $20 million.

Business owners who require smaller amounts of capital can apply to the SBA’s Microloan Program, which provides funding in amounts below $50,000. These loans are typically used to launch a new business, provide working capital or purchase inventory or supplies. Usually these loans are made by non-profit organizations and community lenders for which helping small ventures get off the ground is part of the organization’s mission.

In addition to filling out an application for an SBA loan, borrowers must be willing to submit personal financial information, including two to three years of tax returns. If the funding request is from an existing company, the business owner must be prepared to provide financial data from the company’s past two years of operation. Further, a funding submission should also include a well written business plan that provides a blueprint for the success of the company over the next three to five years.

A success business plan should include the following:

  1. A one or two-page Executive Summary that outlines the company’s goals, operations, marketing efforts and revenue model.
  2. Business Description: The product or service that the business provides.
  3. Competitive Landscape: A detailing of the local market conditions.
  4. Product or Service: The differentiation of your company’s product or service.
  5. Marketing Plan: This important section details how the company will inform the marketplace its offerings. This section should include website development, advertising, public relations, and social media outreach.
  6. Management Team: Introduce the reader to the principals of the firm and their areas of expertise.
  7. Financial Data: Data should include a break-even analysis, cash flow projections, balance sheets and profit-and-loss (P&L) statements.
  8. Investment Contribution: Lenders want to know how much of their own money they are investing into the business. After all, why would a bank or other lender take the risk when the company owners are unwilling to do so?
  9. Appendices: Photos, charts, graphs, logos, etc.
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