The Small Business Administration was founded when the 83rd Congress passed the Small Business Act in 1953. This agency is designed to encourage banks and other lending institutions to offer small businesses loans. They do this by backing up a certain percentage of the amount loaned, reducing the risk to the lender and increasing the likelihood that the recipient will qualify. This is intended to promote competition and stimulate the economy by creating jobs. Businesses which are new or small often have trouble qualifying for traditional loans, because they lack the track records and assets necessary for good credit ratings and collateral.
In order to qualify for this program, a business owner must establish his or her character, reliability, and commitment to certain stated goals, as well as the potential of his or her business. After all, they want a return on their investment, both in monetary payback and in serving their intended mission. While these standards may be tough, it is far easier for some business owners to prove potential for an SBA loan than to meet the credit standards for a traditional secured loan. Most creditors will not put much stock in a vision—they can’t afford to take that kind of a risk.
Special businesses qualify for increased benefits. Demographics such as minorities, women, veterans, and the disabled are often offered special programs. Businesses that export, work to reduce pollution, or serve underdeveloped areas are also given extra incentives. Benefits for such types of businesses include getting a higher percentage of the loaned amount guaranteed, having certain fees from both the government and the bank waived, or having the application expedited and streamlined.
A small business is defined as one that is worth no more than $6 million, including all affiliates, with an annual profit no greater than $2 million immediately before the business applies for help. There is usually a limited amount that businesses can receive on loans, and there are also further stipulations as to how the money from the loan can be used.
One may think that a business should contact the SBA directly when seeking to participate in one of these loan programs, but that is not the case. Because the SBA does not make the loan directly, but rather guarantees a certain amount of the loan from a lending institution, the business owner should contact a bank or other lender that works with the SBA.