The Small Business Administration (SBA)

Chapter 22: Getting Financed - Page 22.5

The Small Business Administration (SBA)

The SBA makes loans to small businesses and even to start-up businesses. SBA loans are almost always applied for and administered by local banks. You normally deal with a local bank throughout the process.

For start-up loans, the SBA will normally require that at least one third of the required capital be supplied by the new business owner. Furthermore, the rest of the amount must be guaranteed by reasonable business or personal assets.

The SBA works with "certified lenders," which are banks. It takes a certified lender as little as one week to get approval from the SBA. If your own bank isn't a certified lender, you should ask your banker to recommend a local bank that is. You can always contact the SBA directly using the contact information posted on its website, at www.sba.gov.

Other Lenders

Aside from standard bank loans, an established small business can also turn to accounts receivable specialists to borrow against its accounts receivable.

The most common accounts receivable financing is used to support cash flow when working capital is hung up in accounts receivable. For example, if your business sells to distributors that take 60 days to pay, and the outstanding invoices waiting for payment (but not late) come to $100,000, your company can probably borrow more than $50,000. Interest rates and fees may be relatively high, but this is still often a good source of small business financing. In most cases, the lender doesn't take the risk of payment — if your customer doesn't pay you, you have to pay the money back anyhow. These lenders will often review your debtors, and choose to finance some or all of the invoices outstanding.

Another related business practice is called factoring. So-called factors actually purchase obligations, so if a customer owes you $100,000 you can sell the related paperwork to the factor for some percentage of the total amount. In this case, the factor takes the risk of payment, so discounts are obviously quite steep. Ask your banker for additional information about factoring.

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