The SBA...Simplified!

When the Pandemic hit, thousands of small businesses took a hit! Here in the United States, these businesses looked to the Government for financial relief. The agency in charge of dispersing the funds is the SBA.

If you asked yourself "What's the SBA?"

You're not alone.

The SBA stands for the Small Business Administration. It is a federal agency, which means it is part of the government! Believe it or not, the SBA has been around for a long time. It was founded in 1953 by President Eisenhower.

The SBA was designed to help entrepreneurs in starting a business or growing an existing one. The two most important areas the SBA helps new business are:

1. Facilitating Loans
2. Providing Business Counseling and Resources

Let's debunk a common myth! The SBA does not directly provide loans to businesses. The only exception to this rule is during a national crisis…such as the current Pandemic. During the 2020 Pandemic, SBA directly provided financial relief to businesses under EIDL grants and loans program. EIDL stands for Economic Injury Disaster Loans.

The SBA provided larger relief to businesses under the Paycheck Protection Program, also known as the PPP. The difference between the PPP and EIDL loans is the channel of distribution.

While the SBA directly lends EIDL Loans and Grants to businesses, the PPP loans are dispersed through participating lenders, such as local community banks. Distributing loans through a participating lender is also the SBA's standard lending process when a business applies for a traditional SBA loan.

You may be asking yourself, "If I have to go to a bank to get an SBA loan, why don't I just get a standard loan from my bank?"

There are several reasons why businesses may apply for an SBA loan versus a standard bank loan.

For normal bank loans, the application requirements for businesses are to have assets, existing capital (i.e. money) and a profitable business. Now imagine you are a new business, and you do not own any assets or do not have much money to use as collateral, then the bank may view you and your company as a high risk customer.

On the other hand, since the SBA's goal is to help entrepreneurs launch and grow their business, they tell the bank: "If you provide a loan to that high risk customer, we will be your safety net incase that customer defaults on the loan." Essentially, the SBA acts as the guarantor of the loan to the bank and will pay the bank up to 90% of the defaulted loan, making the bank's risk only 10%.

Now, let's say you have defaulted on an SBA loan. What's your recourse? Well, even though the SBA acts as the guarantor of the loan to the bank, you are the guarantor of the loan to the SBA and therefore, the SBA will pursue you to recover their loan. They will come for your assets, freeze your bank accounts, garnish wages if you are employed, and take your legs out…just kidding about the legs…but they will use every legal approach.

Here are some quick bits of information to give you a better understanding about an SBA loan:

1. Your business must be US based to apply for an SBA loan
2. You must apply for an SBA loan through a participating bank or lender
3. The SBA loan application process requires you to submit a large amount of documents, therefore, be organized as possible
4. You will be required to deposit a percentage of the loan to have skin in the game, therefore some amount of capital will be required
5. Take advantage of the SBA's resource centers as they provide consulting, mentorship and networking for businesses

To know more, visit the Small Business Administration (sba.gov) website or speak to your local bank for lending options.

Until next time!

You stay classy Business Heroes!