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Welcome to the How to Finance a Business series! This series explores different ways to get the financing your for business, regardless if you’re financing your own startup or buying a business already on the market. For many people, money is the only thing standing between them and their goal. You’ve got the business plan to make it work and the drive to see it to the end: all you need is someone who shares your entrepreneurial spirit.
Part Two: SBA Loans
Last week we talked about two of the most conventional methods people use to buy and start-up businesses: credit cards and conventional bank loans. Today we’re looking at one of the most sought-after loans, a Small Business Administration loan. There are a lot of misconceptions about these kinds of loans, not only their cost, but also their origin. This week’s article is focused on taking you through the basics of the different types of SBA loans, as well as how they generally differ from conventional loans.
Small Business Administration Basics
The Small Business Administration is a government agency that specifically focuses on providing support to small businesses and those entrepreneurs who are seeking to start or buy them. Their mission statement is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.” Their services can be broken down into three “Cs,” that is funding capital, offering contracts, and providing counseling.
The SBA doesn’t directly provide loans. These aren’t government grants, no-interest loans, or “free money.” The loans are actually made through conventional banks, credit unions, and other lenders who partner with the SBA. Instead the SBA backs these loans, guaranteeing repayment of part of the loan if the borrower defaults. Under the Recovery Act/Small Business Jobs Act, the SBA now guarantees up to a record 90% of the loan. This makes the lender more willing to lend to small businesses and risky startups.
SBA Loans Programs
While the SBA works through other lending institutions, they provide very specific loan programs, that have certain characteristics regardless of which bank, credit union, or lender provides them. Here are two of the most popular types (more can be found on their website):
CDC/504 Loan Program Eligibility
Lastly there’s the CDC/504 Loan, designed for expanding a company. To be considered for Certified Development Company (CDC)/504 loan, applicants must meet these eligibility requirements:
SBA Loans vs. Conventional Loans
There are certain advantages and disadvantages of a SBA loan verses a conventional loan. Due to the guarantee provided by the SBA, they have advantages, but additional government oversight and qualifications can make getting (and filing) SBA loans difficult. In general SBA loans have:
At George & Company we’ve seen and made a lot of businesses happen, including help getting people the financing they need to succeed. If you’re interested in buying or selling a business, or getting the assistance you need to make that happen, please contact us and we’ll put our skills in M&A, brokerage, and appraising to work for you.