In 1958, Congress passed the Small Business Investment Act, which started up an agency called the Small Business Administration. This agency is designed to stimulate the market, create jobs and promote certain economic goals by helping small businesses get off the ground. They do this by guaranteeing a certain portion of business loans that these businesses receive from banks. This extra security of the guarantee encourages banks to offer loans they may otherwise have been too skittish to offer.
Many special programs serve particular goals such as reducing pollution, developing underserved areas, promoting the upward mobility of disadvantaged demographics (such as women, ethnic minorities, the disabled, Native Americans, and veterans), and increasing exports. Businesses that serve these goals are often offered special advantages, such as decreased interest rates, waivers on certain fees from the bank or the SBA, streamlined applications, an expedited response to their application, or an increased guarantee or loan amount.
The first thing a business owner must determine in order to ascertain whether or not his or her business is a candidate for an SBA loan is whether the business qualifies as a small business by the legislative definition. A “small business” is defined as one that is worth less than $6 million, including all affiliates. In addition, in the two years prior to applying for an SBA loan, the business must have an annual profit no greater than $2 million. If a business is too large to qualify, the owner may wish to consider a more traditional means of obtaining capital, such as a secured loan, an unsecured loan directly from a lending institution, a venture capital firm, or selling stock.
If a business is eligible, the second factor a business owner must take into consideration is what his or her objective is, and whether or not an SBA loan could help achieve that objective. There are many reasons why a business may wish to seek a government-secured source of capital. If the business needs soft resources, such as rented space, labor, or inventory, it would be difficult to obtain a secured loan for which the item being purchased could serve as collateral. (Hard resources, such as purchased facilities, heavy machinery and equipment, and vehicles can typically act as security that can be repossessed for more traditional secured loans.) Another reason a business may seek a guaranteed loan is because it wishes to expand rapidly in order to take advantage of a growing market, and it will need a certain degree of flexibility in allocating the revenue where it is needed while expansion takes place.
If your business is both qualified and could benefit from such a boost, get in touch with a bank that works with the SBA and request more information about the application process.