SBA Loans are a form of debt that is very common in the small business world. SBA stands for the Small Business Administration and is an agency of the US Federal Government. The SBA Loan is, in the most common form, a standard Business Loan from a Bank or similar Financial Institution. What the SBA does is provide some level of risk reduction to the lender. I don’t want to provide an exhaustive detail on getting an SBA Loan. What I will do is provide some thoughts about why this is important and when to use it.
Just so we are clear, SBA support is not free. Think of it like when you first purchase a house and have to have Mortgage Insurance on your home. Once you can, refinance the loan (or point out to your lender that you no longer meet the criteria for needing Mortgate Insurance) to eliminate the charge. SBA loans like Mortgage Insurance provide value directly to the lender not to the borrower. These programs provide indirect support for borrowers.
So, what is this indirect support. Well, I will be blunt. You can’t get a business loan in so many cases, that the SBA guarantee is very important. If you recall in last week’s post, I talked about Underwriting at a Bank. The basics with Banks that I talk to is that they want to loan money to a firm that has had a stable organization for 3 years and can show a profit over that same period. That is BEFORE we talk about the loan and what it might be used for and how it is intended to build the business. By stable organization, I mean that it is in the same corporate structure over that time. So, right now if you are reading this to head to your bank to get a loan to start your business…just turn around. You won’t get a loan that way.
What the SBA does is provide air cover for the lender. If they see that there is a good business plan with people to support it, they want to issue the loan. The SBA guarantee allows them to get around those pesky Underwriting Guidelines to do so. I want to be clear that I put the words “good business plan” in that sentence. That means a narrative and 3 years of proposed financials. If you are thinking you won’t need to know your numbers, you are not thinking about this properly. The Bank wants to make sure that you understand how the operation of your business will end up paying the bills – including them. So, they are likely to have questions about both the numbers and the business that you will need to answer. Saying, “I don’t understand the numbers” will not be comforting to them and help you secure the loan.
An SBA loan is where many businesses have started. Have a great day!
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