Creating or maintaining a small business allows people to grow personally and within a community, bettering both. However, funding a small business can seem like a daunting, or even impossible task. There are numerous methods to achieve funding for a small business, with differing level of risks and requirements. One method that offers many positives, with less “drawbacks” than alternatives, is funding your business through the Small Business Administration (SBA) and their loan program. Small businesses are able to build, grow, and scale based on funding from the SBA loan program(s).

What is a SBA Loan?

Basics

SBA Loans are loans provided through the Small Business Administration and are a form of government guaranteed loans. SBA Loans are dispersed and handled through a specific bank, or “third party”. This third party provides the funds to the small businesses. On the other hand, the government provides assurances to the third party in terms of repaying and backing the loan. There are several types of SBA loan programs based off of numerous factors. For example, the SBA 7(a) Loan Program is the SBA’s most popular loan. The SBA 7(a) loan provides funding based off of perceived financial need, spanning from $350,000 – $500,000. The SBA loan programs allow for more assurances, and less worries, for all parties involved. Subsequently, SBA loans offer a great path for funding the start, growth, of scaling of any small business.

Benefits

SBA loans offer many benefits in comparison to other forms of funding for small businesses. For example, SBA loans offer extended loan terms and amortization rates. Successively, this clears up and improves cashflow amongst business owners. Furthermore, SBA loan programs reduce the initial down payments and collateral amounts for the loan. In turn, this also clears up cashflow for business owners to improve their business currently, make payments towards other bills, or any number of alternatives. Many benefits of SBA loans stem from their guaranteed basis, which allow third-party lenders (banks) to be more lenient than usual — this leniency is reflected in increased cashflows for business owners.

SBA loans offer more benefits than just those that lead to increased cashflow. For example, many SBA-sponsored lenders provide extensions of credit when it often is unavailable elsewhere. Furthermore, SBA lenders consider the entire project for financing, as opposed to other lenders. Often, outside lenders will not include aspects such s soft costs when considering financing. Finally, SBA loans will cover collateral “shortfalls”, in which someone could not provide the industry standard/typical amounts of collateral.

Eligibility Rules and Exclusion(s)

A few rules and regulations around SBA loans exist, such as exclusions and eligibility rules. There are not a ton of exclusions, but it is important to know and recognize what they are prior to applying for a SBA loan. The same thought-process applies to general eligibility rules; you do not want to wait till the application process to find out that you are not within the parameters of an exclusion, but are also missing a necessary asset to fit within the eligibility boundaries. Some of the rules are as follows:

Eligibility

Some basics to be aware of in order to be eligible for a loan from the SBA include, but are not limited to, the following:

• Owners assets may be required to secure a loan. Being said, this means be ready to present a summary of eligible assets that you may have in order to leverage collateral for a loan. Furthermore, this will show the bank that you are prepared.
• Background Checks in order to assure the background of any applicant, including making sure that a person is who they say they are. Furthermore, this allows the bank to weed out any criminal affairs or potential problems prior to the loan process.
• Individual business owners must be US Citizens, or legal Permeant Residents. The SBA is only allowed to sponsor loans to legal US-residents and citizens, based on prior rules.

Exclusion(s)

Some exclusions are self explanatory based off of eligibility requirements. However, some other stipulations that could lead to exclusion  from SBA loans are:

• A loan cannot be used to pay delinquent taxes. This means that someone cannot receive SBA-sponsored loans with the intention of using them to pay back- and delinquent-taxes.
• A loan cannot flow directly back to the business owner or key-employees of the business. This means that the funds from a(n) SBA Loan cannot be used to directly fund key members of the business — this stops business owners from taking out loans for personal or non-ethical reasons.
• Non-residents or non-US Citizens are unable to acquire an SBA Loan, based off of the eligibility requirements found above pertaining to residency status of applicants.

Interested in finding out more? Reach out to a PASBDC consultant today!

Written by Brian Kennerly, Pennsylvania SBDC Lead Office Marketing Team

Brian Kennerly is currently a Graduate Assistant at Kutztown University of Pennsylvania while pursuing his Master’s in Business Administration. His hometown is Upper Darby, PA, and he attended the University of Virginia for his undergraduate career.