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The Small Business Administration's (SBA) 7(a) Business Loan Guaranty Program

The 7(a) Business Loan Guaranty Program is the Small Business Administration's primary small business loan program. It is also the most flexible small business loan program, since the agency can guarantee financing under this loan program for a variety of general business purposes.

In guaranteeing a small business loan, the Small Business Administration (SBA) assures the lender that, in the event the small business owner does not repay the business loan, the Small Business Administration will reimburse the small business lender for its loss. The small business owner however, still remains obligated for the full amount due.

How It Works

You submit a business loan application to an SBA participating small business lender for initial review. If the business lender approves the business loan subject to an SBA guaranty, a copy of the business loan application and a credit analysis are forwarded by the business lender to the Small Business Administration.

Following SBA approval, the business lending institution closes the business loan and disburses the funds to the small business owner. The small business owner makes monthly loan payments directly to the business lender.

No balloon payments, loan application fees or points are permitted with 7(a) business loans. The small business lender can tailor the repayment plan for each small business.

Use of Proceeds

A start-up small business or existing small business may use the proceeds of a 7(a) guaranteed business loan to —

• expand or renovate facilities;
• purchase machinery, equipment, fixtures and leasehold improvements;
• finance receivables and augment working capital;
• refinance existing debt (under some circumstances);
• finance seasonal lines of credit;
• construct commercial buildings; and/or
• purchase land or buildings.

Financing Your Small Business

While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

The Small Business Administration (SBA) is Congressionally mandated to assist the nation’s small businesses in meeting their financing needs. The agency’s small business loan programs enhance the ability of lenders to provide long- and short-term business loans to small businesses that might not qualify through normal business loan channels.

Not All Money Is the Same

There are two types of financing: debt and equity financing. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing.

Debt Financing

There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally.

In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity.

Equity Financing

Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California's Silicon Valley is a well-known example of capitalist investing.

Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing.

You may contact these investors directly, although they typically make their investments through referrals. The SBA also licenses Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies (MSBIs), which offer equity financing. Apple Computer, Federal Express and Nike Shoes received financing from SBICs at critical stages of their growth.

For more information on Small Business Administration small business loan programs, visit www.sba.gov