Most first-time entrepreneurs are under the impression that SBA loans are an easy, viable route to funding any startup. While the SBA is an excellent government program to assist American small business, keep in mind that it is a government program, with all that distinction means - the process is slow, the restrictions are strict, and the hurdles to approval are high. Before you commit countless hours and effort to pursuing an SBA approval, be sure you understand the realities of the programs as well as your alternative opportunities for financing your startup.
The SBA is well-organized with distinctive programs to cover various sizes of businesses at various stages. The most common SBA program for entrepreneurs is the 7a Regular, which provides loan guarantees to approved businesses for startup or expansion needs including working capital, equipment purchases and the like. These guarantees are not actual loans but are intended to improve the chances of obtaining a formal bank loan. After all, if the federal government is promising to repay 75% or more of the loan if the borrower defaults then the banks should be clamoring to provide the loans, right? Not so much. In fact, banks are less and less inclined to service SBA-backed loans because of the requirements (read paperwork) set forth in the SBA guarantee regulations and the higher risk of helping out small business. Finding a bank to service an SBA loan is even more difficult if you are trying to fund a startup. The SBA requires a good personal credit score to even have a chance at a 7a guarantee, and the banks will require excellent credit plus your personal guarantee and collateral before they even think about lending the cash.
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