What do the following startups have in common?

• Startup 1 is in an “in-between” place. The founders have already passed the hat and raised seed money, but they lack the funds to pay their staff before the next financing round. Without funding, the startup’s operations will freeze.

• Startup 2 is prepared to acquire a competitor, but one of its lenders backed out. The founders can’t obtain backup funding without giving up equity, which would throw a wrench in the acquisition.

The answer – both startups could solve their problems with an SBA Loan.

What is an SBA Loan?

Small Business Administration general business loans (“SBA Loans”) are a dilution-free source of funding – they provide immediate cash flow without having to give up any equity ownership. SBA Loans are typically more lenient than general commercial loans and can be used for many business purposes, including purchasing equipment, refinancing certain debt, and supplying short-term working capital.

SBA Loans are made by SBA-authorized private lenders, and the SBA guarantees a portion of each loan. The SBA guarantee reduces the risk that a private lender would otherwise assume, making it safer to grant loans to startups. The SBA can guarantee up to 85% of loans up to $150,000 and up to 75% of loans greater than $150,000, up to $3.75 million of total exposure.

SBA Loans can range up to $5 million, and the average loan in 2015 was over $370,000. The SBA charges a guarantee fee for each SBA Loan, which is assessed based on the loan’s time to maturity and the dollar amount guaranteed. Interest rates for each loan vary by lender but are capped by the SBA’s guidelines. The cap depends on the base rate and the lender’s spread, up to an additional 2.25 or 2.75%, depending on the loan’s time to maturity.

Need funding fast? In some cases, the SBA offers an expedited SBA Express Loan within 36 hours of receiving the application. The SBA Express program is available for requests of up to $350,000 with a maximum SBA guarantee of 50%.

What are the Rules?

SBA Loan applicants must meet several requirements:
• 1) The business must operate for profit;
• 2) The business must fit the SBA’s criteria for “small”, which vary by industry;
• 3) The borrowers must have reasonable equity invested in the business;
• 4) The business must have a demonstrated need for the loan;
• 5) The business must be conducted in the United States;
• 6) The applicants must have used alternative financial resources before seeking an SBA Loan, including their personal assets;
• 7) The loan proceeds must be used for a sound business purpose;
• 8) The borrowers must not be delinquent on any existing debt obligations to the United States government; and
• 9) Each owner of 20% or more of the business’s equity must personally guarantee the SBA Loan.

Among the SBA requirements, the personal guarantee poses the most daunting hurdle. All 20% owners are required to increase their risk exposure in the business, which could be a tough sell to key investors. Additionally, certain business types are not eligible for SBA Loans, such as political and lobbying businesses, financial businesses primarily engaged in lending, and speculative businesses like oil and gas exploration.
Each applicant’s eligibility also depends on the private lender’s criteria, which must comply with SBA guidelines. These criteria may include:

• The borrowers’ backgrounds and experience in the industry;
• Whether the business has enough cash flow to meet its existing debt obligations; and
• Whether the borrowers have adequate collateral in case of default.

What Should I Do Next?

To determine whether an SBA Loan could be a fit for your startup, reach out to Michael Lanahan at Michael.lanahan@bryancave.com or contact your local SBA chapter for a list of approved lenders.









Fortune Bank, “Could an SBA Loan be Right for You?”, available at https://www.fortunefincorp.com/sba-loans/sba-right-for-you/.