The Small Business Administration (SBA) has been supporting entrepreneurial go-getters since President Dwight Eisenhower ushered it into existence, with the signage of The Small Business Act, in 1953. Developed to ensure federal efforts successfully nurture small businesses at the local level, in 2014 the SBA helped some 60,000 individuals secure startup capital. But to be clear: the SBA is not itself a lending body. Rather, it guarantees high-risk business loans made by banks, credit unions and other lenders, covering losses if borrowers default.
What are the practical daily functions of the Small Business Administration?
In San Francisco, the SBA holds classes explaining the principles of business financing and management. We also invite lenders who are actively involved with startups and early-stage businesses to speak to entrepreneurs about the process of securing financing. Additionally, we point small business candidates to online platforms and other alternative financing resources that the SBA doesn’t guarantee, ultimately helping them find the best available solution.
How many of the loans that you back default?
The SBA typically guarantees loans for businesses that tend to perform well, so over time, the SBA portfolio has about a 2% loss rate—a little higher than a bank’s 1%-or-less loss rate. The Bay Area’s default rate is actually a bit lower than the national average, partly due to the strong Bay Area economy and because our lenders have done a particularly good job with SBA lending in this market.
How does a bank determine which loans will require an SBA guarantee?
From a bank’s point of view, there are a variety of factors that put a business in a risky position, such as a lack of collateral, or a flimsy credit history. They also consider whether the business is in a high-risk industry. The obvious one is restaurants, which are usually very early stage. You can’t just step into a restaurant. If you’re going to do it, you have to go all in, which makes you a higher risk from a lender’s point of view, because you can’t demonstrate a cash flow. I mean, you can show the histories from a franchise of a chain as a point of reference, but every restaurant is a new startup, which makes them classic SBA borrowers. That said, these businesses can perform exceptionally well, if they survive the first couple of years.
Do you advise people how to prepare for meetings with loan officers?
Yes, all of the time. A big part of this is how well developed your business plan is, coupled with your record of experience. You need to have these things sorted out when you see a lender. And we try to keep people from asking the wrong questions. A classic example is a person who asks the lender, “How much can I borrow?” That question will automatically make a lender reluctant to go any further.
What metrics affect your decision to back a loan or not?
We want to know two things: “Do you have your own skin in the game?” and “Do you have an ability to generate revenue?” If you can’t show us that 1) you’ve put some of your own equity into the deal, 2) you’ve made some sales and 3) you have a revenue source to repay the loan, then you’ll have an uphill battle convincing lenders to take a chance on you.
What’s the average loan size you back?
The average SBA loan in California last year was $450,000, but this rolls together real estate with working capital loans. The range for our guarantee loan program is $5,000 to $5 million.
What advice do you have for millennials looking to get a loan to launch a small business?
In the end, it’s all about money, but in the beginning, it’s all about planning. Too many people jump straight to, “I have an idea, and I need financing,” rather than, “I have an idea, and I need to turn it into a business.” So we spend a lot of time trying to get people to take their idea and move it towards being a business. We help entrepreneurs get the order right, because there are a lot of creative ideas out there, and we want to help people bring them to life.