Government small business loans are frequently misunderstood. Here's a guide to how the Small Business Administrations (SBA) loan program works, straight answers to common myths about the program, and plus some other descriptions and resources.

How the SBA loan program works

SBA administers three separate, but equally important government small business loan programs. SBA sets the guidelines for the loans while SBAs partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's government small business loans guaranty requirements and practices can change however as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking government small business loans assistance in today's market.

Federal appropriations are available to the SBA to provide guarantees on loans structured under the Agency's requirements. With a government small business loan guaranty, the actual funds are provided by independent lenders who receive the full faith and credit backing of the Federal Government on a portion of the loan they make to small business.

The government small business loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty. In a variation of this concept, community development organizations can get the Government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business.

Myths Misconceptions about the SBA and government small business loans.

Just about anyone can get an SBA Loan.

No. The SBA loan program has specific eligibility requirements.

The SBA process to get a government small business loan requires too much paperwork.

No. Actually it is the lender that does much of the paperwork. While applying for an SBA loan may have more paperwork than a conventional loan, all-in-all, the increase of such extra work is worth it if your loan is accepted

SBA Loans are just for women and minorities

No. The SBA loan programs are available for all persons, regardless of race, color creed, age or ethnicity. There are, however, special programs to encourage women and minority borrowers to utilize the program more, but the agency doesnt not have any special funding for these categories.

The government will monitor your business if you have an SBA loan

False. If you participate in the SBA loan program, your business activities will not be monitored, and the SBA will not audit your business. Obtaining assistance from SBA does also not increase your chances of being audited by the IRS or other government agencies.

If you default on your government small business loan, SBA will work directly with your lender to recover the loan. An SBA lender doesnt really care how well your business is doing

False. Lenders participating in the SBA loan program are very concerned that you are able to repay the loan. If an SBA lender continuingly issues loans, they will likely be scrutinized by SBA, and perhaps eventually dropped from the government small business loan program.

Types of government small business loans from SBA

The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.

PROGRAM: Basic 7(a) Loan Guaranty

FUNCTION: Serves as the SBAs primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agencys most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.

CUSTOMER: Start-up and existing small businesses, commercial lending institutions

DELIVERED THROUGH: Commercial lending institutions www.sba.gov/financing/sbaloan/7a.htm SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs.

PROGRAM: Certified Development Company (CDC), a 504 Loan Program

FUNCTION: Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (and up to $1.3 million in some cases).

CUSTOMER: Small businesses requiring brick and mortar financing DELIVERED THROUGH: Certified development companies (private, nonprofit corporations set up to contribute to the economic development of their communities or regions) www.sba.gov/financing/sbaloan/cdc504.htm

PROGRAM: Microloan, a 7(m) Loan Program

FUNCTION: Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the microloan to the applicant. These organizations also provide management and technical assistance. The loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states.

CUSTOMER: Small businesses and not-for-profit child-care centers needing small-scale financing and technical assistance for start-up or expansion

DELIVERED THROUGH: Specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance) www.sba.gov/financing/sbaloan/microloans.htm

PROGRAM: Loan Prequalification

FUNCTION: Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicants character, credit, experience and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan-request terms. The program is administered by the SBAs Office of Field Operations and SBA district offices.

CUSTOMER: Designated small businesses

DELIVERED THROUGH: Nonprofit intermediaries such as small business development centers and certified development companies operating in specific geographic areas. www.sba.gov/financing/sbaloan/prequalification.htm Finding and SBA Loan Lender http://www.sba.gov/financing/basics/lenders.html