Financing Options For Small Businesses

For the vast majority of businesses, loan
financing comes from private banks. As what
a lender is able to offer varies signifi-
cantly from bank to bank in terms of cost
and size of loan, as well as repayment
schedule, it is advisable to shop around
at several lending institutions (both large
and small) for capital. Also keep in mind
that while small independent banks have
long been committed to financing community-
based firms, several major operations (no-
tably Bank of America and Wells Fargo) are
now actively pursuing the small business

Even if you are turned down by one bank,
you can learn quite a bit from asking the
loan officer probing questions about the
strengths and weaknesses of your loan package.
Often a banker who declines your loan request
can give you recommendations which will make
it much easier to overcome potential concerns
and succeed when making your next presentation.

Exhausting private sources of loans be-
fore seeking a governmental loan guarantee or
direct loan is a necessary step, and will un-
doubtedly help you refine your loan package.
The government should be considered a secondary
source of financing after private lending op-
tions have been explored.

U.S. Small Business Administration Loan Guaranty

SBA offers a variety of loan programs to eligible
small businesses which cannot borrow on reason-
able terms from conventional lenders in the amount
needed without government help. Most of SBA’s
business loans are made by private lenders and
then guaranteed by the Agency. While it may not
necessarily be easier to be approved for an SBA
guaranteed loan, the guarantee will allow you to
obtain a loan with a longer maturity at better
repayment terms and interest rates, thereby re-
ducing your monthly payments and the initial
loan burden. However, entrepreneurs generally
have at least a one-third equity stake in the
business before SBA will guarantee a loan.
SBA will guarantee up to 90 percent of loan
amounts less than $155,000 and 85 percent of
loan amounts more than $155,000. Guaranteed
loans have a maximum of $750,000 (SBA’s share)
with maturity of up to 25 years (the average
size is $175,000 with an eight-year maturity).

SBA has also initiated a Small Loan Pro-
gram, which is helpful in meeting the needs of
women and minorities, and encourages lenders to
consider SBA guaranteed loans of $50,000 or
less. Lenders making loans of this amount, with
maturities exceeding 12 months, retain one-half
of the 2 percent guarantee fee payable to SBA.
They then have the option of retaining it, or
passing the savings along to the borrower. Again,
entrepreneurs generally must contribute one-
third equity share in the business, and must
show collateral for the amount being borrowed.

Special SBA Financial Programs

* Surety Bonds make the bonding process accessi-
ble to small and emerging contractors who, for
whatever reasons, find bonding unavailable. The
contracts may be used for construction, supplies
or services provided by either a prime or subcon-
tractor for government or non-government work.

* The 504 Program is a very popular loan program
designed to enhance community economic develop-
ment through job creation and retention. The pro-
gram assists small businesses in capital invest-
ments (including machinery, equipment and real
estate) by providing long-term fixed asset fi-
nancing of up to 20 years through cooperation
with the California Certified Development Cor-
poration (CDC). The financial package is com-
prised of at least 10 percent owner equity, up
to 40 percent SBA Guaranteed CDC Debenture, and
50 percent from a third-party financier in the
private sector.

* Small General Contractor Loans assist small
construction firms with short-term financing.

* Seasonal Line of Credit Guarantees provide
short-term financing for businesses which ex-
perience seasonal decreases in business acti-

* Energy Loans are available to firms engaged
in manufacturing, selling, installing, servic-
ing or developing specific energy measures.

* Handicapped Assistance Loans are available
to physically handicapped small business
owners and private non-profit organizations
which employ handicapped persons and operate
in their interest.

* Physical Disaster Assistance and Economic
Injury Disaster Loans help businesses and in-
dividuals recover from officially declared

* Pollution Control Financing is available to
businesses needing long-term, fixed interest
financing for planning, design and installa-
tion of pollution control facilities or equip-

* Small Business Investment Companies (SBICs)
make venture/risk investments by supplying
equity capital and extending unsecured loans
to small enterprises which meet their criteria.
They help through straight loans and/or equity
investments, providing management assistance
to the companies they finance.

Regional Development Corporations (Small Busi-
ness Development Corporations), Office of Small
Business, California Department of Commerce

These community-based, non-profit corporations
serve as a “one-stop shop” for state financial
programs. They offer loan guarantees as a de-
livery mechanism for Office of Small Business
lending programs, as well as provide informa-
tion and receive applications for a variety of
special loan programs.

Business and Industrial Development Corpora-
tion (BIDCO)

These for-profit corporations are privately
funded and chartered by the Department of
State Banking to make SBA-guaranteed loans
to small firms. Call the Office of Small
Business at (916) 445-6546 to find the near-
est BIDCO.

State Assistance Fund for Enterprise —
Business and Industrial Development Corpo-
ration (SAFE-BIDCO)

SAFE-BIDCO is an independent, state-sponsored,
non-profit corporation that works in coopera-
tion with the SBA and the Office of Small
Business to provide access to a variety of
federal and state financial assistance pro-
grams. It aims to assist with workforce ex-
pansion and economic growth, particularly
for disadvantaged firms or those needing to
comply with environmental mandates. Call (800)

California Statewide Certified Development
Corporation (CSCDC)

Allied with the Office of Economic Development,
CSCDC assists small businesses in accessing
public financing programs. It works with the SBA
under the previously mentioned 504 Loan Program
to provide financing for the purchase, renova-
tion or construction of real estate, buildings
or other fixed assets. In addition, CSCDC pro-
vides 90 percent real estate financing for
healthy, growing businesses throughout Califor-
nia. Call (916) 322-5000.

Financing Alternatives

Numerous other financial options exist for small
businesses, depending on their location and
needs. The following should be considered for
special loan information and alternative finan-
cing methods.

Local Governmental Programs

Some of the best programs for small businesses
are available at a local level, and are usually
operated by the mayor’s office or a local busi-
ness development organization. Many of these
programs offer financial consulting, and a grow-
ing number are beginning to establish micro-loan
funds available to local businesspeople with
very little collateral or other financial back-
ing. These programs can often fill the existing
gap that makes it difficult for many start-ups
to get financing. In addition, special financing
programs for minority and women-owned businesses
may be available through local public and pri-
vate entities.

Section 301(d) Small Business Investment Com-
panies (SSBIC)

These are private, for-profit corporations char-
tered by the SBA to provide loans, venture capi-
tal and/or equity investments to small busines-
ses owned and operated by socially or economical-
ly disadvantaged persons, including women and

Enterprise Zones

Enterprise Zones are cities and portions of
cities targeted for economic growth by the
Department of Commerce’s Office of Business
Development. Companies locating or expanding
in any of California’s 19 Enterprise Zones
can take advantage of significant tax incen-
tives and marketing assistance programs. Ex-
amples include tax credits of as much as
$19,000 per employee, sales tax credits,
cost-competitive sites, comprehensive sales
leads and training programs.

Because Enterprise Zones are located in
pro-business communities, you will find expe-
ditious processing of permits and plans, as
well as reduction or elimination of construc-
tion-related fees. With such strong incentives
and little or no red tape, it can be highly
profitable to invest and hire in these areas.

In addition, the Office sponsors Employ-
ment and Economic Incentive Zones, which offer
tax breaks and other benefits based on where
your employees live. As these programs are
aimed at promoting job growth for certain de-
pressed areas, at least 51 percent of your
employees must reside in the target region.
To find out if you are near an Enterprise or
Employment and Economic Incentive Zone, call
(916) 324-8211.

Venture Capital

A very small percentage of high-growth-poten-
tial businesses can solicit venture capital
through companies and individuals who see the
possibility of making a profit by investing
money in the endeavor for a percentage of fu-
ture revenues. Venture capital is an outstand-
ing resource for projects with high capital
requirements and high potential profits.

Entrepreneurs, however, who view the ven-
ture capital firm as merely a source of funds
and not as a significant player on the manage-
ment team are ignoring a badly needed source
of support during the critical start-up period.
The hands-on assistance and broad perspective
of a venture capitalist often make the dif-
ference between success and failure.

Rural Areas

Several assistance programs are offered for
businesses located in rural areas.

Business and Industry Program for Rural Com-
munities, Farmers Home Administration (FmHA),
U.S. Department of Agriculture

This is a guaranteed loan program which pro-
vides financial assistance to a variety of
endeavors. Its aim is to assist projects that
save existing jobs, improve existing business
or industry, or contribute to the overall ec-
onomic stability of rural areas. Job creation
is the key component of the program. In addi-
tion, FmHA offers limited direct loans through
the Intermediary Lending Program. Call (916)

Small Business Revitalization Program (SBRP),
Office of Local Development (OLD)

This program helps small businesses obtain
financing, particularly in rural areas and
those dealing with SBA’s Local Development
Corporations. Specific assistance is provi-
ded in the form of packaging loan requests,
and submittal of completed loan packages
to appropriate lenders for consideration
with or without federal or state agency
guarantees. Call (916) 322-5000.

Posted by on March 21, 2000