Uncle, can you spare a dime?

Don’t overlook the Small Business Administration’s loan program

Small-business owners don’t want a handout, especially from the government. But if you’re looking to launch a new business or expand an existing one, you ought to know about the U.S. Small Business Administration’s 7(a) Loan Program.

It’s not a handout. Indeed, it’s not even a loan. Rather, it’s a fund (fattened by your tax dollars) that increases your chances of getting a loan from a bank.

First, let’s work through the reasons you may have for dismissing 7(a). Nearly all entrepreneurs and home-based businesspeople I know succeed in spite of, not because of, the government, and are proud of it

We are fillers, not emptiers, of federal and state coffers. We pay double Social Security taxes even though Social Security may be broke when we’re ready to collect. We save every receipt to keep the IRS at bay. Many of us pay preposterous fees to the towns we live in for the privilege of earning a living in our basement offices. Heaven forbid we violate code!

In return, all we ask is that the government fill the worst of the potholes and teach our kids a state capital or two.

Well, here’s the big Dr. Phil moment: I hereby give you permission to ask your government for a little more.

One of the most popular offerings of the 51-year-old Small Business Administration is the 7(a) Loan Program. Most, but not all, U.S. banks participate, as do many other financial institutions, such as credit unions.

Under the program, a small-business owner applies for a loan at a participating institution. If the bank believes the risk/reward ratio is acceptable, the loan goes through on a conventional basis. If the loan looks shaky, but not outrageously so, the 7(a) program kicks in. In such a case, the bank can request that if the borrower defaults, the SBA reimburse a percentage (up to 75%) of its loss. The program amounts to risk mitigation for lenders, which frees them to green-light more loans.

To qualify for a 7(a) loan, borrowers and lenders alike must meet reasonable criteria. The SBA has adopted a flexible definition of “small business” – trust me, if you’re reading this, you qualify. Only for-profit enterprises qualify, and I’m afraid that if you’re out on parole and/or launching a pyramid scheme, you’ll have to look elsewhere.

Interest rates on 7(a)s are negotiated by borrower and lender, but in order to participate, banks must agree to caps set by the SBA. Pegged to the Prime Rate, the caps vary depending on the amount and maturity of the loan. The maximum size of a 7(a) loan is $2 million.

Have I wet your whistle for a 7(a)? If so, you’re in good company. A few weeks ago, the SBA announced the program had guaranteed a record 67,493 loans in fiscal 2004, topping 2003’s total by 23%. I’d apply myself except for the dang parole thing.