5 Realities of Small Business Loans

This is a great time to start a small business!  The Recovery Act has provided more funds for the Small Business Administration and higher loan guarantee amounts.  And banks are still lending, if you have the right qualifications (a high credit score, collateral, and a great business plan).  In the photo, Ben Spearing assembles a baby stroller as his wife, Billie Jo, unpacks a wheel as they prepare for the opening of their baby store in Costa Mesa, California, in April. (Paul Rodriguez/Orange County Register/MCT)

But the realities of getting a small business loan haven’t changed. Here’s what I mean:

Reality 1: The SBA does not lend money. The SBA provides a guarantee to the lender for a percentage of the loan, so if you default, the bank gets at least some of its money back.  The Recovery Act includes increased loan guarantee percentages up to 90% for SBA-guaranteed loans, but the bank still makes the decision on lending you money, based on all the information you provide.

Reality 2:  There is no such thing as 100% financing. You will be required to put something into the business, sometimes “sweat equity,” but usually cash. Even with the increased SBA guarantees, the bank will most likely want at least 25% from you as the business owner.  It makes sense that you have to put something into the business, so if it fails you have as much to lose as the bank.  I had a banker tell me once, “We want you [the small business owner] to hurt as much as we do if your business fails.”  So count on being required to put in some collateral.

Reality 3: Your credit history is important. If used to be that you had to have good credit (a FICO score of 650 or above).  Now your credit has to be exceptional, with a FICO score over 740.  If your credit is not at that level, your chances of getting money for start-up are low.  You can repair your credit but it will take time (years, maybe), so this might not be the time to start that business.

Reality 4: The lender (i.e., bank) will probably require your personal guarantee. In other words, even if the loan is guaranteed by the SBA and you have funds to contribute, you may have to use personal assets like your home to guarantee the loan.  There is almost no way around it, so if you’re not prepared to do this, don’t get the loan.  It doesn’t matter if you set up the business as a corporation or LLC to try to minimize your liability, the personal guarantee will still require you to pay back the loan if the business doesn’t succeed.

Reality 5: There are no federal grants available for profit-making businesses. Don’t let scam artists tell you they can help you get a government grant; they can’t.  There aren’t any. The SBA does offer some grants to non-profit organizations for training purposes, but they specifically state, “The U.S. Small Business Administration does not offer grants to start or expand small businesses.”

Having said all this, I would still encourage you to work on starting a business and finding financing.  It’s still possible.

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