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Considering raising capital, apply for SBA loans first. . .

September 4, 2008

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This afternoon I was talking to an entrepreneur with a startup doing more than a million in revenue.  They are expanding and will need around half a million to hit break even given their expansion plans.  It isn’t the perfect time to be raising money in his space, but his business is so unique I am fairly certain he will be able to find the money - eventually, at some price.  I began thinking about whether or not I would be interested in doing all or part of the deal and began running through a number of questions.  Finally it occurred to me that based on what I would want in return for my money and how confident he was in his success that our concept of ‘fair’ relative to valuation would be very different.  I asked if he had applied for an SBA loan and while he had talked to a few banks (who turned him down), he had never asked about a 7(a) loan backed by the U.S. Small Business Administration.

Commonly known as SBA loans, these notes are government guaranteed up to 85% of the note (i.e. very low risk).  I suggested that he apply for one.  Even if he was turned down, and I think that is unlikely, it says a lot that he is so confident in his ability to execute that he would personally guarantee the $500,000 he sought from the bank under the 7(a) program.  SBA’s 7(a) Loan Program has a maximum loan amount of $2 million dollars. SBA’s maximum exposure is $1.5 million. Thus, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent.

Putting the documents together that are necessary for the bank is a great way to prepare to meet with angels.  You also have a great story.  My advice?  Apply for the loan ASAP. Signup at the SBA and find out if you are eligible for an SBA loan here.

Written by Alexander Muse · Filed Under Blog, Startups 

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