Getting Money to Start a Business Would-be entrepreneurs need to remember three letters—SBA. BY MARK EWING
Starting a business can be a gamble, but proper funding can improve your odds.
Kermit the Frog once lamented that, "being green isn’t easy." The same is true for green—aka young—couples that want to get started in business.
For one thing, there’s a bit of a credit crunch right now, which makes it harder for everyone to get a loan. But would-be entrepreneurs also face the triple whammy of limited capital, minimum experience and an inherent skepticism from lenders. There are a bunch of couples out there who fantasize about launching their own business, but don't think they can financially get started. Are you one of them?
What's A Couple to Do?
Get acquainted with a lender that works with the federal Small Business Administration (SBA), which offers programs that often allow fledgling business owners to pursue their dreams. In other words, the SBA provides tools that enable banks to say "yes" instead of "no."
The 7(a) program is the SBA’s primary offering. Essentially, the SBA guarantees a significant portion (as much as 85 percent) of a participating lender’s loan. That makes a lender much more willing to make a loan.
A 7(a) loan can be used to buy equipment and machinery, for business acquisitions, to expand or renovate business facilities, for leasehold improvements and for working capital. It may also be used to refinance some debts, as a seasonal line of credit and to buy commercial land or buildings.
Repayment terms are up to 25 years for real estate and the purchase of fixed assets and five to 10 years for working capital. Interest rates tend to be a favorable prime rate [plus] 1 percent to prime [plus] 2.75 percent.
Of course, not everyone can waltz in and get a loan.
Your business must be for profit and the loan must not be used for investment or speculative purposes. You should have good credit and a strong business plan. Some investment of your own into the business is highly desirable and there should be collateral involved.
In situations where existing businesses want to expand, consider the SBA’s real estate-focused 504 program. Via 504, a bank might provide 50 percent of the cost for a business to move to a new location, while the SBA lends 40 percent and the business itself comes up with the remaining 10 percent. The SBA typically provides 20-year fixed-rate financing at below market rate terms.
As with 7(a) loans, similar caveats apply.
Here’s one other bit of advice: young couples looking to start their own business might want to consider staggering when they start. If one person keeps an existing job, it allows the couple to maintain both cash flow and those all-important benefits.
Those first few months when a business struggles to get off the ground typically are the most difficult financially for young couples, but there is hope. Let the SBA be your version of an SOS.
Mark Ewing is a vice president at Fox Chase Bank of Hatboro, Pa., and specializes in small business lending, particularly for surgery centers and other medical practices. He may be reached at firstname.lastname@example.org or 610-283-9999.