When running a business, it can be easy to become overwhelmed by the statistical success rate of entrepreneurs - or lack thereof. While there are various reasons some businesses don’t survive, often it’s because of money issues. Running a business is expensive, but the Small Business Administration (SBA) may be able to help through its various, borrower-friendly, loan programs.
Learn more about this government agency and some of the programs it offers to entrepreneurs across the United States.
What is the SBA?
The SBA is a federal government agency with a mission to help entrepreneurs grow and develop their small businesses. The SBA was created to “maintain and strengthen the nation's economy by enabling the establishment and vitality of small businesses and by assisting in the economic recovery of communities after disasters.”
The history of the SBA
President Eisenhower initially launched the SBA on July 30, 1953, after signing the Small Business Act, but it was a work in progress for decades before it became “official.” In 1932, President Hoover created the Reconstruction Finance Corporation (RFC) to help during the financial crisis of the Great Depression. In 1942, Congress launched the Smaller War Plants Corporation (SWPC) to support small businesses that produced war materials via direct loans. And in 1951, Congress started the Small Defense Plants Administration (SDPA), working directly with small businesses that were able to fulfill government contracts.
And finally, the SBA came to be. It was actually President Eisenhower’s response to Congress which was considering abolishing the RFC, and to this day, the SBA helps small businesses around the nation.
How exactly does the SBA help small businesses? The agency specializes in research, advocacy, counseling, and educational programs through regional and district offices.
The SBA exists to ensure entrepreneurs get adequate support. In fact, their Office of Government Contracting works to guarantee that at least 23% of all prime government contracts go to small businesses, including:
- Small, disadvantaged businesses.
- Women-owned small businesses.
- Service-disabled, veteran-owned small businesses.
- Small businesses located in historically underutilized business zones.
The SBA is perhaps best known for providing a guarantee on small business loans made through banks, credit unions, and other lenders who work with the agency. This helps make lending less risky for these institutions because the SBA secures a portion of the loan in case the borrower defaults.
Since 2009, the SBA has backed more than $150 billion in loans through its various programs. The different SBA loan types include:
- Standard 7(a)
- 7(a) Small Loan
- SBA Express
- Export Express
- Export Working Capital
- International Trade
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SBA guaranteed loans
There are various ways to borrow money through SBA programs. The agency makes it easier for small businesses to access the capital they need to grow while providing more security to the lender, who might be taking a chance on a new business. Let’s take a closer look at some of the SBA loan types.
For loan amounts between $5,000 and $5 million, the SBA’s “flagship” product is the 7(a) loan. This loan can be used for:
- Working capital
- Purchasing equipment, machinery, and supplies
- Purchasing real estate
- Refinancing debt
- Construction or renovation
- Starting a new business or acquiring one
To be eligible, the business must operate for profit in the US and be current on their other debt obligations. And they must have tried using other financial resources (like personal assets) before asking for financial assistance.
With SBA Express loans, the agency will generally respond to your application within 36 hours. The maximum loan amount is $500,000, and the lender determines eligibility.
Certified Development Companies (CDCs) manage these loans specifically for the purchases of commercial real estate or large business equipment. They are long-term and fixed-rate. A financial institution provides 50%, the CDC finances 40%, and the business owner is responsible for 10% of the loan amount. The maximum loan amount is $5 million, although some companies can receive up to $5.5 million.
To be eligible, the small business must operate for profit in the US, have a tangible net worth of less than $15 million, and have an average net income of less than $5 million post-tax.
These business loans can be used for:
- Buying or building land, new facilities, or machinery/equipment
- Improving land, streets, parking lots, and other factors of existing facilities
You cannot use a 504 loan for:
- Working capital
- Refinancing, repaying, or consolidating debt
- Investing in rental real estate
Besides loans, the SBA also offers lines of credit meant to help small businesses meet short-term or seasonal operating needs. Credit via the CAPLines program is available for up to $5 million.
The evolution of the SBA and small business support
Since the 1950s, SBA lending initiatives have helped small businesses thrive. They help businesses that might otherwise have been overlooked get financing through various loan types and lines of credit. By offering security to lenders through guaranteed loans, the SBA looks out for both the interests of small businesses and the trust of the financial institutions.