by J Corey
Pierce
http://www.businessfinance.com
©
2009
Being classified as a small business isn't a bad thing.
In fact, it means that you may qualify for a large amount of support from the
Small Business Administration or "SBA".
When you
are in business for yourself, it is critical to develop a good knowledge base,
and that is also what will help you wade through the myriad of small business
loans.
So Let's Look at How SBA Loans Work
The
first thing you need to understand is that you as a business owner are not going
to deal with the SBA yourself. The SBA does not act as a principle lender. Instead
it backs loans made to small businesses that might otherwise not find a favorable
market in traditional lending circles. This means that you will still seek financing
from your regular source of lending: banks or other private financial institutions,
and if they feel that you have merit but perhaps do not quite meet their more
stringent requirements for a loan they put the loan forward to the SBA as a security
backing.
The SBA (Small Business Administration) provides
security for part of the loans presented to them. That way the lending financer
shares part of the burden of your risk and they assume the other share. Therefore,
you will still need to present a good case to your lender to convince them of
your worthiness for a loan.
When you are looking for small
business loan consideration it is important to make sure the lender you use participates
in the program. Not all lenders do and it is not required by law. Thankfully it
is not hard to find lenders that work happily with the SBA.
Types
of SBA Loans
The most common SBA loan is the Basic 7(a)
Loan Guarantee. This loan covers many areas and can be used for a wide variety
of business resources. As with most SBA loans to qualify for this loan you must
be a for-profit business and present a solid performance record and/or business
plan to prove your desire to make money from your company. While the Basic 7(a)
Loan can be used for most business applications there are some very pointed things
it may NOT be used for:
- Refinancing existing loans or
debts. - Create a change of ownership of the existing business, partial or full,
that will not enhance the current business. - Provide funds for the owner, or
any partner in the business. - Pay back taxes, liens, or any other funds in escrow.
- For any function considered unsound for the business.
The
next common type of SBA loan is the Certified Development Company (CDC) 504 Loan.
This is a long-term loan with a high maximum; however, the drawback to this loan
is that it has very defined uses. This loan must be made for the acquisition of
business equipment, real estate, equipment for expanding an existing business,
or the expansion of an existing business. This loan may NOT be used for:
-
Working capital - Inventory - Debt repayment - Consolidation, or refinancing
To
be eligible for the 504 Loan a business must be for-profit, and not engage in
any form of speculation or real estate for investment or rental.
Finally
there is the Microloan, 7(m) Loan Program. This is a short-term loan with a maximum
of $35,000 made to small businesses and even not-for-profit businesses for child-care.
It is a loan designated for working capital, and many other operating expenses
such as the purchase of initial or on-going inventory, supplies, and other operating
needs. This loan may NOT be used for:
- Pay debts - Purchase
property
Extra Considerations
Along
with size there are some types of business that have other criteria that have
extra criteria to meet to be eligible:
- Franchise businesses:
Franchise businesses are eligible for SBA loans so long as the owner of the business
is not in control of the main franchise, or has power to control the operation.
They must also have a right to profit from the franchise as an owner should. -
Recreational clubs and facilities: In order to be eligible the business must be
open to the public, not biased against any one person or persons, and operate
for a profit. - Farms and Agricultural types of business: Are eligible but should
pursue more specialized loans from ag related sources. - Fishing vessels or businesses:
Are eligible for loans not covered by the National Marine Fisheries Service. -
Medical facilities: Are eligible so long as they have the appropriate licensing
and are more than a boarding house type of facility.
There
are also considerations for certain persons who are eligible so long as they have
the lawful right to operate a business. Those persons on probation or parole are
only eligible if they are not currently involved in a current parole or probation
situation, currently a defendant in criminal court, used a SBA loan application
to get their probation or parole lifted or suspended.
Who
Can Not Apply for a SBA Loan
The SBA does not guarantee
loans for real estate investment firms or business involved in rental properties.
You cannot successfully apply for a small business loan if your business is speculative
in nature, involved in lending, an MLM or pyramid sales program, operating for
the purpose of gambling, or for any illegal activity.
The
SBA does not approve loans for charitable, religious, or other non-profit organizations.
Final
Thoughts
In some cases there are penalties involved in repaying
a loan early. Be sure to talk to your lender about all of the possibilities before
signing any loan. There is rarely a problem with business loans of any kind when
you take the time to completely understand the requirements. Never be in too much
of a rush. It is understandable that you are anxious to get going. You are excited
about your prospects and that is good. Diving into any loan just because you can
get it is never a good idea, however. The best circumstances is when you are calm,
ready to do all your homework, and also ready to push away from the table if you
do not feel the situation is desirable.
The SBA offers many
classes for business owners to help them fully understand what is available to
them as well as other vital aspects of operating a business. The SBA wants you
to succeed, and they want to help you every step of the way.
