Hey Bruce Naylor here. Getting financing for your business can be complicated. A lot of small companies get started out of the owner’s zone personal fund such as your savings, maybe home equity loan, using credit cards. Hey you might go to friends and families if they can help you. Of course, there are venture capitalist and angel investors and those sorts of things. These are great ways to get your business started but you know there's also an organization called the SPA. The small business administration is in business of guaranteeing loans to small business throughout North America. Annually they make over $10 billion in loans but there are a lot of misunderstandings about what SPA does and how it works so I though I’d make this brief video for you to kind of go into those details.
There's going to be when you do look for SPA financing. There's some questions are SPA, actually the lender. And first of let me explain that SPA does not loan money directly to you rather they work with banks and other non-bank lenders by guaranteeing a portion of the loan. And so in essence in case the loan goes bad the lender can go back to the SPA and get some compensation from the SPA.
So with that in mind when you apply for SPA insured loan there's going to be some basic questions that the lenders are going to want to know. And the first that they want to know what are you going to use the money for. The next question could be how much do you need and when do you need it. They're going to ask you how are you going to pay this loan back and what are you going to use pay it back with. What kind of collateral to put up for the loan and are you willing to personally guarantee the loan. These are some of the questions that a loan officer who’s working on SPA loans is going to ask you so it’s important to have these ducks in a row so to speak.
Now here are some good tips for you to have when you do apply for SPA loan. Number one you should have a business plan ready to go. You should have a statement of purpose which spells out exactly for the loan officer what you're using the loan for. Exactly the questions I mentioned earlier how are you going to pay it back, how much are you going to need, for how long, etc. And also make sure you have your financial statements lined up it’s like your profit and lost statement, your balance sheet. It’s a good idea to actually schedule appointment with your CPA prior to applying for a small business loan to have these ducks in a row.
Let me give you some quick facts about the SPA. Number one, there is no thing as 100% financing through the SPA they simply don’t do that. Also they don’t provide financing for—there are no grants that they have for starting a business, they don’t do such a thing. Your personal and business and business credit are extremely important to the SPA. They want to make sure they're in the business of backing a good businesses and people who are responsible. You must be willing to personally to guarantee the loan. So they won't do a loan without you personally guaranteeing the loan. They won't finance non-profit businesses. They will not finance a type of business where you're purchasing real estate for investment and they won't finance any kind of businesses in the pyramid sales type business. And their maximum exposure to any single business is $1.5 million so these are important things to know.
The most common SPA program out there is called the 7A Program. It’s not fully guaranteed remember as I said no SPA loan is 100% guarantee but they guarantee upwards of 85% of the loan amount. There's a loan standard base on the size, the type of loan and the purpose of the loan.
Now your business must be independently owned and operated so here are some guidelines. Number one, if you're in the wholesale business you can't have any more than 100 employees. If you're in the retail or service industry your annual revenues cannot exceed $21 million a year. If you're in manufacturing you can't have over 500 employees, if you're in the construction industry your average sales can exceed $17.5 million a year.
Loan terms are restricted and there is strict in this way. If you're borrowing money from the SPA for working capital you get 7 to 10 years to pay that back. For machinery up to 25 years and for real estate up to 25 years. That’s the 7A program kind of a nutshell.
They also have a MicroLoan program which is put out to non for profit organizations such your economic development office in your community. Now their maximum loans are going to be no more than $35,000.00 actual average amount is about $13,000.00 on loan amount. They still require that personal guarantee and they may require some type of industry specific training and certification before they make the loan so it’s good to know these things.
And finally, the SPA also has some specialty loans for export and so forth. It was also called 504 program. That’s going to be designed more for the acquisition of fix asset for your company, for your small business and it’s partially funded. There has to be a 10% investment either from the borrower, from the CDC and they may have job creation requirements in granting the 504 program. The 7A bottom line is the basic SPA type of loan but remember you're going to have to have some of your own cash involve in the deal that’s just the way. If anybody tells you any different does not mean that there are lenders out there offering SPA insure loans, they are doing 100% there are some out there but again there’s still going to be personal guarantee, there's going to be collateral possibly taking a mortgage on your real estate or whatever. But the SPA in it of itself does not guarantee 100% of loan that’s important to know.
Get your business plan together; get your financial statements together. Take a look at what we call the 3 Cs of credit which is character, capacity and collateral because that’s what the underwriter is going to be looking at. How stable you are, your cash flow your ability to repay the loan in timely basis and then there's security event that you can't repay the loan. These are the things you're going to be looking for when you're ready to go and apply for that loan. Have your financial statements, have your statement of purpose, have all your eyes out and tees crossed and you may very well find yourself getting a small business loan in extremely favorable and competitive term.
I'm Bruce Naylor your frugal tech always make sure to comment our videos, rate them. We love to hear from you. We put on a live webcast everyday between 1 and 3 PM Eastern Standard Time just visit www.frugalbrothers.com. Click the link that says Frugal tech blog. Hey Bruce Naylor, remember we’ve seen your shot not making any money or save your money give it out there. I’ll talk to you later.
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