A few weeks ago, a potential buyer asked me how he could get a loan from the Small Business Administration (SBA).  The short answer was that he was not going to get the SBA to give him a loan to purchase a company, but he could get a loan from a local bank that provides loans which are guaranteed by the SBA. 

What he did not know is that the SBA does not typically give loans (one notable exception is a business damaged by a certified Natural Disaster).  The SBA only guarantees a loan provided by a commercial institution. 

Let's take a step back and provide a little background before we proceed.

A Bit of History

The SBA had numerous predecessors that date back to the Great Depression and World War II eras.  Obviously, everyone suffered during the Depression and the small business owner was not left-out; as the nation geared-up for war, large companies flourished but small businesses struggled to keep pace.  In response to these difficult times, the federal government established the RFC and the SWPC to provide help to the small business owner.  (The two agencies were named the Reconstruction Finance Corporation (1932) and the Smaller War Plants Corporation (1942)).  From these roots grew the SBA in 1953.  The purpose of the SBA was and is "to help Americans start, build and grow businesses."

 
Types of Loans

Now let's take a brief look at how the SBA helps small businesses with funding. The SBA guarantees 3 types of loans: 7(a), Certified Development Company, and the Microloan.  The 7(a), the most common, is capped at $7M.  The CDC loan is capped at $4M and is specifically for community development work.  And lastly, the Microloan is for $35K or less and is given by the SBA through a local intermediary.

Since most loans fall into the 7(a) category, let's speak specifically to how a small business owner would obtain one.  A small business owner (or someone who aspires to that title) writes an application document that delineates the business profile, intentions (how the money will be used), collateral and also includes business and personal financial statements.  These documents are taken to a commercial lender (one that provides SBA guaranteed loans) who then evaluates all information before determining if they will extend the loan.  Note: the SBA will only guarantee 75% of the loan.  If the lender has become an SBA Preferred Lender, they will be able to evaluate and approve the loan on the SBA's behalf.  Bear in mind that lenders want to see that the individual seeking the loan has personally funded the business as well before they loan additional funds; this of course illustrates a genuine interest on the part of the owner.

Once the loan is granted, it can be used for working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvements, and debt refinancing (dependent on the circumstances).

The Outcome

After providing a great head start to our potential buyer, I directed him to take a look at the SBA website (www.sba.gov) and told him he would benefit from a 30 minute discussion with his local Preferred Lender commercial bank.  Clear Rock has access to a wide range of resources and lenders.  One of our professionals can assist you through the process as you seek to finance one of our listings. 

Brett Paradis is an Associate with Clear Rock.  He can be reached directly at 201-433-0679 x117.