Dangers of Using the SBA

The U.S. Small Business Administration (SBA) is a federal government agency designed with the purpose of helping develop and grow small business in the United States. The SBA provides loan guaranteed to private lenders who make loans to businesses. The guarantees provide lenders with assurances that if the business fails or the borrower defaults on their loan obligation, the government will step in and provide relief up to 90 percent of the loan amount.

SBA Loan Guarantees

The SBA does not provide direct loans other than disaster relief in the case of a natural disaster.  Using the SBA as a loan guarantor helps small businesses obtaining financing through a private lender.  Loan guarantees require a private lender participating in the SBA program to step in and make the loan. If a lender is not available or does not offer the type of loan program that a business needs, it can create a funding gap for the business. Finding a lender in an area where the business is located can be done in coordination with the SBA. The SBA has published lists of qualified lenders.

7(a) and 504 programs

SBA offers different programs for small businesses including the basic 7(a) and 504 programs.  A business looking to obtain some financing can use the 7(a) loan guarantee program as a way to meet their initial funding needs. 7(a) loans are a good financial source for new businesses that are looking to bring a product to market or offer a needed service within a community or nationally.

Other Concerns Regarding the SBA

A business relying on the SBA may be subject to political decisions or other government agencies on the program. A change in administration or political philosophy can result in the removal of funding for certain small business loan guarantees. A small business should look to all available sources for financing and not become solely dependent upon the programs offered through the SBA. Private lenders and business lending services may be better resources for a small business and should be considered.

A business should consider all sources of funding that are available and make a plan that will allow it the flexibility to access those sources applicable to its business needs and purposes.  Relying on the dollars provide in guarantees through the SBA should help a business meet its capital and financing needs. A business should view dollars borrowed from a private lender in the 7(a) and 504 loan programs as a good first step.