Business loans from Uncle Sam
The government can help you get cash with the SBA’s 7(a) program, but banks still hold the purse strings.
Chris Holm, LUK Industries, Chandler, Ariz.
I run an Internet retail store that has been in business for just over a year. The business is running in the black, so I want to move some of our start-up costs to a fixed-rate loan. Is an SBA 7(a) loan the right choice for us?
By Kathleen Ryan O’Connor
Dear Chris: Congratulations on making it through your first year of a new venture with a profit. That’s no easy feat.
Leveraging that success to consolidate some of your expenses may indeed be a smart move. But before you start filling out the mountain of paperwork required to obtain a 7(a) loan from the Small Business Administration, you need to figure out how big a risk you and your business pose to a traditional bank.
Contrary to popular belief, Uncle Sam doesn’t lend money directly under the 7(a) program - you must still apply through a commercial lender. But the government does guarantee 7(a) loans in order to mitigate risks that might prevent a bank from lending you the money directly, says Ron Goldstein, assistant director for economic development in the SBA’s New York office.
Those risks could include the type of business you’re in, the number of years you’ve been operating, a shortage of collateral, high debt-to-net worth, or concerns about your ability to service debt, he says.
Assuming that an SBA-backed loan makes sense for your business, you need to figure out exactly what you want to do with the money so that you spend it wisely, says Germain Boer, a professor of management and entrepreneurship at Vanderbilt University’s Owen Graduate School of Management.
A clear plan will also help you get the loan. “That makes the bank feel more comfortable with you,” says Boer.
But small business owners shouldn’t look to the SBA program as some sort of freebie: “This is not any kind of a gift,” Boer says.
At the very least you’ll need to provide financial statements that demonstrate past performance, along with a detailed cash budget for the next two years.
Given the current credit crunch and economic uncertainty, the bank will probably require you to secure the loan with solid assets.
Ask yourself one crucial question before signing on the dotted line, Boer says: “Can I really risk losing that?”
Need more information? Free advice from the SBA is plentiful in your area. The agency’s SCORE program - the acronym stands for Service Corps of Retired Executives, all SBA volunteers - has two nearby chapters, the East Valley SCORE in Mesa and the Phoenix SCORE.
If your financial needs are relatively modest, you might look at the SBA’s Microloan Program, which is targeted to “start-up, newly established, or growing small business concerns,” according the SBA Web site. You could be eligible to borrow up to $35,000, with an average loan of $13,000.
Give us your advice: Check out recent “Ask & Answer” questions.
Related links:
Writing a winning business plan
Securing small business loans in a melting economy
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I have started 3 Internet businesses, all were in the black within the first year. One of the things I love about Internet ventures is that you can put in cyber- sweat equity instead of borrowing cash and grow the businesses quickly and turn a profit within a few months. Of course building an online store is even harder that a brick and mortar store front and is the last thing I would put my fate into on the Internet. The Internet was intended to be about easily accesible information and the search engines are hungry for information, not goods. My first web business, that helps people starting a cleaning business sells our proprietary method, but the website is totally about easily accessible quality information. If you can make your store a go-to-source for quality information, then people will find your site and learn about your products and then purchase your products… maybe. Information is where it is at, it is the information highway not the stuff highway.