Entrepreneurship, Second Edition

11.12. Obtaining Early Financing from External Sources

It's almost impossible for a brand-new company to get a conventional bank loan because it has no trading history and usually no assets to secure the loan. Even after a young company is up and running, it is still difficult to get a bank loan. Many entrepreneurs overlook the possibility of getting an SBA-guaranteed loan.

11.12.1. SBA-Guaranteed Loans

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The U.S. Small Business Administration (SBA) administers three separate loan programs. The SBA sets the guidelines for the loans, while its partners (lenders, community development organizations, and microlending institutions) make the loans to small businesses. The SBA does not make direct loans but works with thousands of lenders and other intermediaries. The SBA guarantees these loans, thereby eliminating some of the risk to the lending partners. The SBA guarantees 85% of a loan under $150,000 and up to 75% of a loan greater than that figure. Interest rates on SBA-guaranteed loans are negotiated between the borrower and the bank, but they are subject to SBA maximums and generally cannot exceed 2.75% over the prime rate for loans greater than $50,000. The bank has to pay a one-time guarantee fee of 2% to 3.75% of the principal; that fee is usually passed on to the borrower.

To qualify for SBA loan assistance, a company must be operated for profit and fall within size standards. It cannot be a business engaged in the creation or distribution of ideas or opinions, such as newspapers, ...