A business financing option if the bank says ‘no’

  • By Calvin Goings SBA Regional Administrator, Region 10
  • Thursday, March 31, 2011 11:06am
  • Business

Perhaps no activity in starting up a new business in Snohomish County or formulating plans for growth of an existing business will have as much impact on your prospect for success over the long run than ensuring adequate financing.

How do you go about financing your enterprise? The U.S. Small Business Administration recommends developing a proposal, including a business plan, and visiting a commercial lender with whom you’ve done business, a place where you are a known quantity. If that lender will finance your proposal, then you don’t need the SBA.

But if that lender declines, or tells you that it can make the loan only if you can line up a guarantor, then the SBA’s 7(a) loan program may be the answer for you.

The 7(a) program is the most basic type of loan the SBA offers to small businesses. In fact, to be precise, it is not a loan per se, but a guaranty that the SBA provides to participating lenders, thus making it easier for them to make small business loans they otherwise wouldn’t.

Under the concept, businesses apply to a commercial lender for a loan. The lender, using its own criteria, decides whether to make the loan on its own or whether the application has some weaknesses that would call for an SBA guaranty.

The SBA guaranty assures the lender that if the borrower does not repay the loan, the federal government will reimburse the lender, up to the percentage guaranteed by the SBA.

All businesses that are considered for financing under SBA’s 7(a) loan program must meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate sufficient cash flow to meet all of its monthly obligations, plus a monthly loan payment.

Remember, the SBA guarantees the loan, but the borrowers are obligated for the full amount due. Also, you have to be of good character and be able to provide a reasonable collateral or owner participation.

Most small businesses in Snohomish County don’t need a whole lot of money to start or to expand, but they do need good repayment conditions, namely, longer terms and low interest rates. The 7(a) loan program provides both.

The SBA encourages longer terms, but actual loan maturities are based on the purpose of the loan and the useful life of the assets financed. In general, though, 7(a) loan maturities can go from 10 years for working capital, to a maximum of 25 years for land and buildings or debt refinancing.

Finally, interest rates are negotiated between the borrower and the lender. However, since interest rates can be an important factor in the repayment ability of borrowers, the SBA has established limits that vary according to the size and maturity of the loan.

For more information about SBA services, go to www.sba.gov or call the Seattle District Office at 206-553-7310.

Calvin Goings is regional administrator for the Small Business Administration’s Region 10.

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