How Do SBA Loans Work? - BusinessTown

How Do SBA Loans Work?

The United States Small Business Administration (SBA) offers three types of funding to help small businesses.

The SBA does not make direct loans to small businesses. Rather, the SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro-lending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners.

So when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing at reasonable terms. SBA loan guaranty requirements and practices can change as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, you can’t rely on past policy when seeking assistance in today’s market.

The SBA can guarantee as much as 85 percent of the loan proceeds, so while the lending institution will have some risk, it should also be willing to take on more risk than with traditional loans. SBA loans can be as large as $5 million. Most SBA loans are through banks. You can ask your bank whether it makes SBA-guaranteed loans, or you can go to the SBA website for a list of participating lenders. In addition, the SBA has a microloan guarantee program for loans up to $50,000. These loans are provided through nonprofit community-based organizations. You can find a list of participants on the SBA website.

SBA loans typically take extra time and extra paperwork, although the SBA also has programs for express loans with shorter forms. You can expect to sign a personal guarantee, and you will generally be expected to have some collateral. You may not get the entire loan at once; instead, you may get it in parts, such as after supplying invoices supporting the need for funds. The interest rate may well be higher than on a conventional loan. You may pay extra fees, such as a guarantee fee and a servicing fee, both based as a percentage of loan proceeds, on top of interest costs.

In addition to loan programs, the SBA offers the Surety Bond Guarantee (SBG) program, which helps small business contractors who cannot obtain surety bonds through regular commercial channels.
A surety bond is a three-party instrument among a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The SBA’s guarantee gives sureties an incentive to provide bonding for eligible contractors, thereby strengthening a contractor’s ability to obtain bonding and greater access to contracting opportunities for small businesses.
SBA can guarantee bonds for contracts up to $5 million, covering bid, performance, and payment bonds, and in some cases up to $10 million for certain contracts.

Finally, the SBA supports a venture capital program. SBA’s Small Business Investment Company (SBIC) program is a public-private investment partnership created to help fill the gap between the availability of growth capital and the needs of small businesses. The SBA does not invest directly in small businesses, relying instead on the expertise of qualified private investment funds. The SBA licenses these funds as SBICs and supplements the capital they raise from private investors with access to low-cost, government-guaranteed debt. With these two sources of capital backing them, SBICs search across the U.S. for promising businesses in need of debt or equity financing. SBICs are similar to other investment funds in terms of how they operate and their pursuit of high returns. However, unlike other funds, SBICs limit their investments to qualified small business concerns as defined by SBA regulations.

Takeaways You Can Use

  • The SBA does not lend directly to small businesses.
  • The SBA lends indirectly by guaranteeing a large percentage of loan amounts through participating banks and organizations.
  • Not all borrowers will qualify for SBA loans.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.

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Learn how to find a great business idea with this course. Discover how to generate awesome business ideas, how to evaluate them, and how to choose the very best one for you. 10 lessons. 2 ½ hours.

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Hi there, I’m Bob Adams, BusinessTown founder, serial entrepreneur and Harvard MBA.

I have started 17 businesses. Most of my businesses I started with less than $2,000 – including one business that I sold for $40 million dollars.

But I was once in your shoes, not sure what to do or how to get started. I had to learn what works and what doesn’t work, sometimes the hard way.

I’ve got great news for you! You’re not going to go through years of trial and error. Because the recipe for business success is waiting for you on BusinessTown.

On Businesstown you’ll get short video courses that will show you exactly what to do at every step of starting your business. From finding your idea to writing your plan and making your first sale, we will guide you through the entire process.

So if you are thinking about starting your own business, take advantage of our 7 day free trial and see what BusinessTown can do for you.

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Frequently asked questions:

BusinessTown is an e-learning platform built for people interested in starting and running a business. 

On BusinessTown, you get unlimited access to 130+ business courses taught by real successful entrepreneurs and highly skilled experts. You also gain access to 50+ business tools and to our discussion board, where you can get expert answers to your business questions.

No matter what you want to learn or where you are on your business journey, there is a course for you. 

Marketing, ideas, financing, planning, naming, how to get started… BusinessTown covers everything you need to start and run your business right. 

The courses are available anywhere, anytime, on any device, and you can take them at your own pace. 

Create your BusinessTown account to get started and try BusinessTown free for 7 days. 

BusinessTown includes unlimited access to 130+ business courses taught by real successful entrepreneurs and highly skilled experts.

You also get full access to 50+ downloadable tools like worksheets, templates, and samples, and to our discussion board where you can get an answer to any business question you have. 

BusinessTown is $19.95 per month. It provides unlimited access to all 130+ courses, all tools, and our discussion board, where you can get expert answers to your business questions.

We offer a free 7-day trial. If you decide that BusinessTown is not for you, then just cancel within 7 days of starting your free trial and you will not be charged at all.

If you wish to cancel your BusinessTown account, you can do so through your account page under the Billing section. 

If you have any questions, email us at bbisson@businesstown.com. We are more than happy to help!

BusinessTown includes 130+ courses on all business topics: Getting started, business ideas, business plans, strategy, marketing, websites, social media, online advertising, finance, accounting, leadership, sales, legal issues, home-based businesses and more!

Looking for a business idea? Why don’t you check out our course How to Find a Business Idea. 

Do you need help creating your business plan? We’ve got you covered. Take a look at our course How to Create a Business Plan.

Do you want to be walked step by step through the entire process of starting a business? Check out our ultimate course, Start-a-Business 101. 

Are you not sure that you are ready to start your own business? Consider our course, What It Takes to Start a Business.

Are you looking for financing for a new or existing business? We offer 5 courses on financing a small business. We suggest you start with the course, How to Finance Your Business.

Do you want to learn about marketing? Because it’s so important, we offer over 30 courses on sales and marketing. Consider starting with the short course, Developing Your Marketing Message.

Want to learn about marketing online? We offer 5 courses on creating websites, 6 courses on digital marketing and 5 courses on promoting through social media. To get started we recommend the course, The Complete Guide to Digital Marketing.

Looking to get inspired and learn how other entrepreneurs succeeded in starting and growing their businesses? We offer several courses on this including, How to Succeed as a Woman Entrepreneur.

Do you already have a business and are looking to improve it? We have several courses on this topic. Try starting with the course, How to Boost Profits.

No matter where you are on your business journey, there is a course for you.   

On BusinessTown you have access to 50+ downloadable tools like worksheets, samples, and templates to help you start and run a business. 

Our most popular tools include:

The Ultimate Startup Checklist, 18 pages 

The 300 Best Small Business Ideas ebook, 105 pages 

The Complete Business Plan Template, 29 pages

Complete Sample Business Plan, 35 pages 

Sample Marketing Plan Under $2k, 12 pages

One Page Marketing Plan Template

One Page Sample Marketing Plan

50 Guerilla Marketing Tactics Worksheet, 8 pages

Business Idea Evaluation Worksheet 

8 Basic Steps to Making the Sale Template

Sales Presentations that Your Customers Will Love Template

Sales Presentation Sample Dialog

50 Ways to Generate Endless Sales Leads Worksheet 

Cold Calling Script Template and Sample

Emails that Land Sales Template and Sample

Voicemails that Get Callbacks Template and Sample

Income Statement Templates and Samples

Balance Sheet Templates and Samples

Cash Flow Templates and Samples

Calculate Depreciation Template

Key Financial Ratios Sample

How I Started a Successful Business with No Money and No Experience, Case Study

Key Questions to Select the Best Business Idea Worksheet

Validate Your Business Idea Worksheet

Using the 6-Step Approach to Choose a Business Idea Case Study

21 Easy-to-Start Part-Time Business Ideas Guide

42 Home-Based Businesses You Can Start Guide

Why I Repeatedly Changed the Legal Entity of My Business, Case Study

Evaluate Customer Segments and Competitors Worksheet

Differentiate Your Business from Competitors Worksheet

How I Differentiated My First Business in a Crowded Marketplace, Case Study

Creating a Press Release Template and Sample

Marketing Bob’s Rent-A-Bike, Case Study

Planning, Designing and Creating Your Website Worksheet

Search Engine Optimization Worksheet

50 Blog Post Ideas Worksheet

50 Creative Online Marketing Ideas Worksheet

Evaluate Potential Names for Your Business Worksheet

How I Financed Buying a Business Case Study

Cover Letter to Seek Financing Sample

Collection Letter Samples

The Four Quadrant Theory of Time Management Graphic

BusinessTown courses will show you how to start your business right and grow it into a highly successful enterprise. 

You will learn from highly experienced entrepreneurs and experts who have been there and done it. You won’t have to learn by trial and error. You won’t have to guess what to do next. BusinessTown courses will guide you through your entire business journey.

Even if you are a beginner you will quickly learn how to start a business you love. If you already have a business, BusinessTown will show how to grow it and make it better.

By just watching one video lesson a day (about 7 minutes average) you can quickly ramp up your business knowledge. No matter where you are on your business journey, there is a course for you taught by an expert on BusinessTown.

What would you like to learn more about today? Starting a business? How to find a business idea? How to write a business plan? How to do your marketing? How to build an online presence? How to get financing? How to prepare financial statements? BusinessTown has courses that cover all these topics and hundreds more.

So if you want to become a smarter entrepreneur and start and build a successful business, you’ll want to start streaming the courses on BusinessTown today.

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