With the usual governmental flair for understatement, US Small Business Administration chief Hector Barreto declared April 1, 2004 a "great day for small business." Funny, it hadn't seemed much greater than any other day around your firm, had it?
But this is not all hot air. What Barreto was announcing was a substantial, Senate-approved increase of funding for the Small Business Administration's popular 7(a) loan program, which provides federal guarantees on loans for small businesses. This is welcome news for entrepreneurs, many of whom have designed their annual budgets and cash flow projections around the 7(a) loans in recent years.
Under a new job creation bill approved by Congress, the SBA's 7(a) program will provide an additional $3 billion in loans this year - that's over and above the $9.5 billion it had already been providing in previous years. On top of that, a much-reviled lending limit of $750,000 imposed last year has been rescinded and returned to a roomier $2 million cap. The SBA says all of that means the program will likely reach 90,000 small businesses during fiscal 2004.
So is it really a great day for your small business? Maybe.
The SBA loans for small businesses are best suited to capital expenditures or acquisitions, although in some cases 7(a) loans are approved to provide working capital for asset-heavy and cash-light businesses (despite the fact that such businesses should theoretically have an easier time borrowing against their own assets). Because the loans are not more than 80% guaranteed by the SBA, you will still need to come up with collateral for at least some of the debt, although far less than you would if the SBA were not backing you up. And bank managers will be as eager as ever to receive assurances that the borrowed money will be spent in a way that will reliably grow your business and result in cash yields in the future.
The length of maturity depends on the way you plan to use the loan. Loans for working capital generally come due in 10 years, while terms on loans for equipment and fixed assets can be as long as 25 years. Interest rates are not uniformly higher or lower than any other private bank loans - the key benefit here is that the federal guarantee allows you to borrow far more than your available collateral would otherwise permit.
As with all government programs, actually getting the money into your bank account can be somewhat trickier than watching the press conference on TV. Business owners interested in the loans need to ask the usual questions of whether the loan is right for them, along with considering how best to pitch themselves to the banks and the SBA itself.
For many business owners, the major drawback to these loans is (surprise, surprise) government red tape. The paper trail to a 7(a) loan can be long and tortuous to navigate. Although anecdotal evidence suggests that the SBA and participating banks tend to favor established businesses, new entrepreneurs are not ruled out. The SBA and the bank managers are, put simply, mainly interested in whether or not you will be able to pay the money back. Established businesses with records of profitability are obviously better positioned to demonstrate that they can pay the money back; entrepreneurs with shorter records may have better luck seeking 7(a) loans to acquire franchises of established chain businesses or other successful small businesses. Again, because the key feature of these loans is that they effectively multiply your collateral, they are generally best suited to small businesses seeking to acquire other small businesses or businesses that have relatively little in the way of fixed assets and are looking to buy equipment.
If you think the 7(a) loan is right for your business, you can get started at the Small Business Administration web site (www.sba.gov). There, you will find the necessary forms and background information, along with information about the banks that offer 7(a) loans (the SBA lists "certified" and "preferred" lenders for the program). Take the paperwork one step at a time and don't be discouraged. When coupled with a solid business plan, the 7(a) loans can be a key part of taking your business to the next level.