Small Business Administration or Small Business Association

Many years ago, I had the pleasure of speaking to a group of aspiring franchise owners at a convention in Anaheim, California. In my remarks, which of course I thought were brilliantly conceived, I referenced the “Small Business Association”. Not just once but: 1) First I introduced our company as being licensed by the Small Business Association; 2) During the bulk of my talk as explained how the Small Business Association has two programs the 7a and 504 to help attendees; and 3) In my closing I explained how it was my privilege to represent the Small Business Association. For a little context, this was my second day on the job, working in an industry I knew nothing about. Afterwards, the two ladies on the panel with me asked me to join them for a drink, being a cocky individual I was sure that they were going to tell me what a great job I had done. Imagine my surprise, embarrassment, and whatever feelings you can imagine when they politely told me that the SBA was an acronym for the Small Business Administration.

This is a true story and one that will certainly help you, just as it did for me, to remember the agencies real name U.S. Small Business Administration.

While you are here, let me share with you a few things about the SBA, aka Small Business Association. Contrary to popular belief, the SBA is in most cases not directly lending money to any small business. The SBA is actually much more like an insurance agency. The SBA facilitates investment in small business loans by providing a guarantee against loss for the investors or lenders, not the Small Business Owners. Below is a numerical example that explains how the SBA guarantee plays out in the two most popular SBA programs: the 504 and the 7a.

SBA 504 Loan

NonBank Lender provided a $500,000.00 Priority or First Mortgage

Investors funded an SBA guaranteed bond for $400,000.00, which is a Junior or Second Mortgage on the property.

Originally the property was purchased for $1,000,000.00

The Small Business Borrower defaults immediately and after the property is sold and after all expenses and costs the total amount recovered is $750,000.00.

The first $500,000 goes to retire the Priority or First Mortgage. The remaining $250,000.00 partially retires the Investors that funded the Junior or Second Mortgage. That being said, those Investors still owed another $150,000.00. Assuming there are no other assets from any obligated guarantor the SBA would step in and pay the final $150,000.00 to make the Investors whole.

SBA 7a Loan

The same property was purchased for $1,000,000.00.

This time however, NonBank Lender provided $900,000.00 in a single loan, which the SBA agreed to guarantee approximately 75% of the Lender’s loss in the project.

Again, the Small Business Borrower defaults immediately and after the property is sold and after all expenses and costs the total amount recovered is $750,000.00.

The Lenders Loss is therefore, $150,000.00 of which the SBA would then step in and pay $112,500.00 to reduce the lenders loss to $37,500.00.

The next time you hear a fellow entrepreneur talk about obtaining or receiving a loan from the SBA you will have something interesting to add to the conversation. But remember don’t make that fatal mistake and end you great explanation by calling the Small Business Administration the Small Business Association. That being said, no one would probably know the difference.

For straight information about Small Business Administration loans, process, and options do not hesitate to contact us through the form below or give us a call at 714-202-1166.