“Because that’s where the money is.” – Willie Sutton, on explaining why he robbed banks

Almost all small businesses and start up companies face a similar problem when it comes to obtaining adequate capital. Whether the business is doing well – when capital will be needed to fund growth – or the business is struggling – when capital will be needed to help revise and develop a new plan and positioning – entrepreneurs are painfully familiar with the drill of going hat in hand to look for investors and funding sources with deep pockets.

When it comes to the search for capital – many entrepreneurs and small businesses overlook a major source of potential help. They forget about the option of going to ask for funding at the bank. Entrepreneurs become so focused on the task of raising equity investment from angel or seed investors that they forget about the option of debt financing. As Willie Sutton used to explain about why he liked to rob banks – because that’s where the money is – the fact of the matter is that good old bank loans may very well be available to help fund your small business’ capital needs.

The Small Business Administration is perhaps the single most important player in the market for small business loans. The SBA itself does not originate or make loans but rather it acts as a guarantor when a commercial bank makes a loan to a qualified small business borrower. The SBA has a range of programs available, the most important of which is Section 7(a), under which the SBA will guarantee up to 85% of the loan for loans up to the amount of $3 million. The availability of the SBA guarantee is a crucial factor in making bank loans available at a reasonable interest rates for qualified small business borrowers.

The SBA loan guarantee program has some serious drawbacks. To start with, as is typically the case when the government is involved, the SBA loan program entails a tremendous amount of red tape, paperwork, and documentation, which makes the loan application burdensome and time consuming.
Note: There is an express loan process available for loans in the amount of less than $350,000.
The other major drawback is that the SBA guarantee comes at a price of requiring the borrower to pledge collateral to secure the loan, whenever such collateral is available. So if you’re an entrepreneur with personal assets, such as a home with substantial equity value, you are going to have to pledge those assets as additional collateral to secure the loan in order to obtain the benefits of the guarantee. This doesn’t mean that SBA guaranteed loans always require the borrower have collateral but in any instance where such collateral is available it must be pledged.

Notwithstanding these drawbacks, the SBA loan guarantee program serves a crucial role in the small business loan market. It’s not the only option to consider and many small businesses may qualify for a direct commercial loan without the support of an SBA guarantee. It’s a very real option, and something of a fallback for an entrepreneur to consider, in the search for potential sources of debt financing.