Small business loans are loans guaranteed by the government. Like most bank loans, they can be difficult to issue and the process can be frustratingly long. But the repayment terms are usually very friendly.
An example of a government loan program, and in fact the largest in the world, is the Small Business Administration (SBA), USA. It is a government agency that supports entrepreneurs and small businesses by providing them with easier access to capital.
Although they are called government loans, these loans are not technically issued by the government. The agency is responsible. Rather, the agency supports the loans and promises to repay them in case of default, giving banks some opportunity to approve loans or allow borrowers to repay loans over an extended period of time. Thus, in reality, these loans are issued by banks.
Why apply for SBA government loans?
In fact, in the United States, the Small Business Administration has several lending programs that provide finance to small businesses that cannot get loans on their own from credit institutions. It should be noted that small businesses cannot apply for loans from the SBA unless they cannot obtain funding from other sources.
A number of Fortune 500 companies in the United States are known to have taken advantage of SBA loans when they first started. Large corporations such as FedEx (Federal Express), Apple and Intel and others have used these loans. The success of these organizations and, of course, the trend towards small and entrepreneurial start-ups in America have prompted the SBA and its loan partners to continue to expand their loan programs.
The survey shows that in fiscal 2005, the SBA provided or guaranteed $ 20 billion in loans to small businesses across the United States of America, the largest in recent years. More than 80,000 small companies received loans, of which 28,000 were start-ups.
Who is a candidate for SBA guaranteed loans?
On its official page, the US Small Business Administration identifies SBA-eligible businesses as those that:
- work for a profit;
- are engaged in or offer to do business in the United States or its domains;
- have a reasonable equity capital for investment;
- use alternative financial resources (eg personal assets) first.
In addition, in order to qualify for SBA assistance, a company must qualify as a small business under the provisions of the Small Business Act. This legislation defines eligible small business as an entity that is independently owned and operated and does not dominate its industry.
Since the adoption of the Small Business Act, the SBA has developed sizing standards for each industry to determine whether a company is a small business or not. Sizing standards are set according to the Standard Industrial Classification (SIC) code, but in general the following guidelines apply for major industry groups:
A key criterion for manufacturing enterprises is the size of their workforce. Typically, 1,500 employees is a cut-off point for SBA consideration, but even institutions with 500 to 1,500 employees may not be suitable for small businesses. in such cases, the SBA bases its decision on a size standard for the specific industry in which the business in question operates.
Generally, wholesale establishments applying for SBA financial assistance should not have more than 100 employees.
Retail and services
Financial information is the key factor here; Ideally, retailers and service businesses seeking SBA assistance should not have more than $ 3.5 million in annual revenues, although requests from larger institutions are processed (depending on the industry). Construction or agricultural institutions are also valued based on their financial statements.
Still on its page, the Small Business Administration also takes into account other factors when determining whether a business is classified as a small business. For example, if the business is associated with another company, the owners must determine the primary business activity of both the subsidiary group and the applicant’s business before applying for SBA assistance, the loan request will not be reviewed.
The SBA also has a number of selection rules that apply to specific types of business. For example, SBAs are often preferred by franchisees because their business has a higher success rate than other companies. However, SBA officials will carefully review the franchise agreement before providing him or her with any credit guarantees. If the officials determine that the franchisor has so much control over the franchise operations that the franchisee is primarily an employee, then the SBA will reject the request.
Other businesses, such as the agriculture or fishing industry, are free to seek SBA assistance, but they must first contact government agencies that are directly related to their industries.
How SBA loans work in the United States?
Obtaining first-hand information on how SBA loans work in the United States of America is the first step an entrepreneur should take in seeking to finance their business. This is because the US Small Business Administration (SBA) is the primary source of funding for entrepreneurs, especially those running small businesses.
Let’s face it, the US Small Business Administration does not provide direct loans to small businesses, and the SBA sets guidelines for loans that are then issued by its partners (lenders, community development organizations, and microcredit organizations). The Small Business Administration ensures that these loans are repaid by the borrowers, which eliminates some of the risks for the loan partners.
Just look at it from an angle to better understand when an entrepreneur or business is applying for a loan. An SBA loan, he is actually applying for a SBA structured commercial loan with an SBA guarantee. SBA guaranteed loans cannot be disbursed to a small business if the business owner has collateral requirements to access other loan opportunities. SBA loan guarantee requirements and practices may change as the government changes its fiscal policy; therefore, you cannot rely on past policies when seeking help in today’s marketplace.
The SBA can guarantee up to 85% of the proceeds of the loan, so while the lending institution will have some risk, it must also be willing to take on more risk than with conventional loans. One of the positive aspects of SBA loans is that a business can access loans up to USD 5 million, and most SBA loans are through banks.
You can ask your bank if it provides loans guaranteed by the SBA, or you can go to the SBA website for a list of participating lenders. In addition, SBA has a microloan guarantee program up to $ 50,000. These loans are provided through non-profit community organizations.
SBA loans usually require additional time and paperwork. Although the SBA also has shorter forms of express loan programs. You can expect to sign a personal guarantee, and generally you are expected to have some kind of collateral.
You may not receive the entire loan at once; instead, you can get it piece by piece, for example after billing. The interest rate here can be higher than a regular loan. You can pay additional fees such as a guarantee fee and a commission, both as a rate of the loan amount, in addition to the interest expense.
SBA Surety Bond Guarantee Program
In addition to lending programs, SBA offers the Surety Bond Guarantee (SBG) program, which helps small business contractors who cannot find guarantees through normal commercial channels.
The SBA is a three-way instrument of the guarantor (who chooses to be responsible for another person’s debt or obligation), the contractor, and the project owner. The SBA assurance gives guarantors an incentive to ensure communication with suitable contractors, thereby strengthening the contractor’s ability to achieve intimacy and greater access rights. to contracting opportunities for small businesses. The SBA can promise bonds worth up to $ 5 million.