The Small Business Administration has a variety of different types
of loans that help business owners to start and grow their businesses. These loans almost always require personal
guarantees from owners that own 20% or more of the business. I'm frequently asked if SBA lending is the "best"
thing out there for first time small businesses. Here are a few reasons why SBA financing would be the best and
when it may not be.
1. Are you and your business financially credit worthy? There are
5 basic things that SBA bankers will look at when you are buying a business; we call these the 5 C's. The 5 C's are
Character, Collateral, Capacity, Capital, and Conditions.
a. Character - Are all the owners of the business credit
worthy? Are there any bankruptcies in the last 10 years? Do any of the business owners have histories of felonies?
b. Collateral - Does the business have sufficient collateral to secure the loan? If the business is lacking in
collateral then do the owners have collateral?
c. Capacity - Does the business have the capacity of repaying the
loan in question? Every SBA business loan requires a realistic business pro forma or projections of future income
and expenses. Does this show that the business can be profitable?
d. Capital - This relates specifically to the
borrowers net worth. If the loan goes into default can the owner(s) pay back the balance?
e. Conditions - Do
current market conditions favor lending to the business in question?
2. Are there other ways to finance your business that may be less
expensive? Many business owners automatically go to the bank when they need money. Banks are in the business of
lending money to make money. Entrepreneurs automatically think that the bank should be the first line of financing;
however there are many other resources you can use to finance your business including accounts receivables, IRA,
401(k), Credit Card loans (not borrowing against your credit cards), and auto financing.
3. Are you in a hurry? - Regretfully entrepreneurs wait until
trouble is knocking at their door to deal with these issues. Certain types of Small Business Administration loans
can be done in 24 hours or less but that will depend on the lending institutions status with the SBA and the type
of loan being sought after.