formulate a comprehensive, realistic, thorough business plan for the flower shop.
“The flower shop seemed like the hardest hurdle,” Leslie says. “Getting a retail base and a clientele so that it can sustain itself seemed like the best way to start, and then down the road I could expand to include the culinary aspect. You have your first-year goals, then your five-year, your ten-year … but this was the best place to start.”
That same month, Leslie’s counselor at the Small Business Development Center advised her to apply for an SBA-backed loan, as part of a program that was set to expire at the end of April. The center had worked with a bank in Florida in the past, and had been very helpful with their advisees; Leslie’s plan had a shot, and it was worth applying.
Leslie filled out the 7-page application, and submitted her business plan, along with a lot of other documentation, to the bank, and by the end of March, she learned that she’d been approved for a $50,000, SBA-backed Community Express Loan, as part of the bank’s Express Capital Loan program.
Leslie still needed to come up with the 10 percent down payment on her downtown Austin location—the loan wouldn’t cover this. Fortunately, Leslie had also entered a business plan competition, and she learned in April that her plan had taken third prize. Her winnings enabled her to make the down payment.
Leslie opened her shop in the summer, and began making payments to the bank just one month after receiving her disbursement. “The loan was my working capital. I was able to get the bills paid and buy some inventory,” she says, explaining that she had made a practice of collecting deep-discounted inventory over the years, which really kept her initial costs down. “Being able to have extra capital in the first six months, when I was still building a client base, was really important.”
Within her first nine months, her business had hired three part-timers, took on an intern/business assistant, been ranked by Austin’s local alternative weekly paper among the top three florists in town on its “Best of Austin” list, and broke even financially. “I’m still not taking a salary yet,” Leslie says a year and a half after opening her doors, “but the business is now holding its own. We did $250,000 in our first year.”
Leslie says that although her SBA-backed loan was relatively small in comparison to some other business loans out there, without it her dream might not have come true—at least, not so quickly.
Leslie is among a growing number of Americans who have been able to start or grow their businesses thanks to the Small Business Administration, which guarantees privately funded loans through several loan programs that target a variety of businesses. The SBA now facilitates the lending of tens of billions of dollars every year. And for many businesses, these loans mean the difference between being in business and closing their doors (or never opening them in the first place).
The SBA’s Loan Programs
Businesses usually seek capital for one of two reasons: 1) They’re in survival mode, trying to start up or simply stay in business, or 2) They’re looking to expand.
Businesses in survival mode are looking for subsistence funding just to stay alive. In the case of start-ups, they need money to secure locations, purchase materials and inventory, develop marketing materials, and pay the bills so they can keep their lights on. For other businesses that may have already been in existence, they’re in survival mode because of any number of factors—an economic downturn, construction blocking their entrance, or the emergence of a new competitor, for example.
On the other hand, expansion-mode businesses have a track record of success. They’re profitable and need to grow to increase profits and meet consumer demand. Banks like expansion-mode businesses.
But it’s often survival-mode businesses, particularly in a tough economic times, that are seeking loans. Perhaps they’ve exhausted all their families’ and friends’ resources, have maxed out their credit cards, or simply can’t afford to compete without an injection of funds.
Meanwhile, most commercial lending banks see survival-mode businesses as a great risk; they often prefer lending to businesses that are expanding, who can prove their accomplishments and have considerable assets that ensure they can pay back their loans. And this simply isn’t possible for many small businesses. Here’s where the SBA steps in.
First, it’s important to note that the SBA itself actually doesn’t do any lending. Rather, it sets guidelines for loans made by traditional lenders that it partners with, then acts as a guarantor for those loans made to business owners who might have trouble qualifying for traditional bank loans. The guaranty provided by the SBA on a large percentage of the loan ensures the bank that the majority of the loan will be paid back.
To get an SBA loan, a business owner goes to one of the SBA’s partner banks or lending institutions and applies for the loan directly through this lender. If approved, the loan is eligible for an SBA guaranty, which is a percentage that represents the portion of the loan that the SBA will repay the bank if the business owner defaults on the loan.
The SBA guaranty, at the time of this writing, covers up to 85 percent of the loan amount, which is a considerably lower-risk proposition for banks than loaning to unproven businesses.
The Guaranteed Loan Programs offered by the SBA vary depending on your needs and the size of your business. One of the loan programs is:
Basic 7(a) Loan Program
The 7(a) loan, according to the SBA’s website, provides eligible borrowers with up to $5 million in capital for “starting, acquiring and expanding a small business. This type of loan is the most basic and the most used within SBA’s business loan programs.” All owners of a business with at least a 20 percent stake in ownership must personally guarantee the loan.
A 7(a) loan may be used to:
• Purchase land or buildings, including conversion of existing facilities or new construction
• Purchase equipment, supplies, furniture, and materials
• Maintain short- and long-term working capital for such things as payments on accounts receivable, seasonal financing, contract performance, construction financing, or export production
• Refinance certain business debt with unreasonable terms or conditions
• Purchase an existing business
Borrowers may not use a 7(a) loan to effect a change of ownership or practice that would not benefit the business, pay delinquent taxes or other funds held in trust or escrow, refinance existing debt that would create a loss for the lender, or for any business purpose that the lender may find to be unsound.
The eligibility criteria for 7(a) loans are the broadest of all the SBA’s guarantee programs. This program targets small businesses, which the SBA defines as “one that is independently owned and operated, is organized for profit, and is not dominant in its field.” In general, depending on the business type the business’ annual receipts may have a cap at between $2.5 to $21.5 million. And despite the loan being designed to help start-up businesses, most lenders won’t make this loan to businesses that don’t have two or three years’ worth of financial statements and an owner with equity in the business.
Under the umbrella of the 7(a) program are some specialty loan programs:
SBAExpress: Aimed at expediting the loan application process and getting loans of up to $350,000 quickly into entrepreneurs’ hands, this program targets business owners with a good
