Qualifying for an SBA-guaranteed loan

Sylvia Porter

January 09, 1991|By Sylvia Porter | Sylvia Porter,1989 Los Angeles Times Syndicate Times Mirror Square Los Angeles, Calif. 90053

If you own a small business, there's a good chance that you are eligible for a Small Business Administration guaranteed loan of up to $750,000. In fact, you may be eligible if you're planning to start up such a business.

The SBA doesn't itself lend the money. Instead, you borrow from an ordinary lending institution. The SBA then guarantees that the loan will be repaid.

Unfortunately, the softening economy may make your bank less willing to lend to you. Or it may find it unprofitable to make a loan in the small amount you require.

Because the vitality of small business is essential to economic recovery, the SBA is putting in place incentives to encourage your lender. There is a 2 percent guarantee fee in a small business loan. The banker now is allowed to keep half of that. In recent weeks the agency has proposed also that lenders be permitted to charge slightly higher interest for loans under $50,000.

What are the rules governing SBA loan guarantees? One is that you invest in your own business, much like the down payment required on a home mortgage or auto loan. This usually is from one-third to one-half the value of the business.

If you're borrowing to expand an existing business, you must show that you do not owe back taxes, that the business makes money, and that the loan will not put you over the company's head in debt.

What doesn't seem like a small business to you qualifies as one in the eyes of the SBA. Some manufacturers, for example, may employ up to 1,500 people and still be considered "small."

But not all businesses qualify. The SBA does not guarantee loans to businesses that form or affect public opinion. Nor can you get an SBA-guaranteed loan to speculate in real estate or securities, open a bank or become a partner in a business.

Does your business -- or the business you hope to start -- qualify? There's a simple and inexpensive way to find out.

A nonprofit organization, the National Business Association, in cooperation with the SBA, has produced what it calls First Step Review. This is a computer program that you or your accountant can run. It is easy to use. All you need to do is answer questions that flash on the screen.

After you've run the program, it gives you a score of zero to 100. While the organization makes no guarantees, the rule of thumb is that if your score is 70 or above, it's probably worth your while to apply. The chances of your application request being granted are good (the SBA approved 19,000 loans worth billions of dollars in the 12 months ended last Sept. 30).

You then make formal application. In this, the SBA wants to know many of the things your banker will ask. The purpose, of course, is to be reasonably sure that the loan will be repaid.

If you're serious about going into or remaining in business, then you already have a business plan.

You need to demonstrate:

* Your projected profits and losses.

* What you expect your cash flow to be.

* The market for the goods or services you will offer, and your reason for believing you'll appeal to that market.

* Your qualifications for running such a business, or the qualifications of those you've hired to help you run it.

* Why you need the money.

Be prepared to provide both personal and business financial information.

Guaranteed loan rates are tied to the prime rate and are for terms that vary, based on the purpose of the loan. Working capital must be repaid in from five to seven years, equipment loans can be for as long as 10 years, and loans for a new plant or the property on which to put it can run for as much as 25 years.

To get a free copy of First Step Review, drop a note to the National Business Association, P.O. Box 870728, Dallas, Tex. 75287, or phone the NBA at (800) 456-0440.

The NBA has a variety of services to aid small businesses, from helping to get low group insurance rates for even very small businesses to providing help in business planning and management. You may want to ask about these services as well.

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