Tens of thousands of keystrokes have been expended for years writing about SBA loans.  They’re good, they’re bad, they’re complicated, they take too long, and on and on and on.  But what I almost never see is how they actually work if a borrower approaches a bank for an SBA loan.

SBA loans are commercial bank loans that are guaranteed by the SBA.  SBA does not make loans except for disaster loans.  Because they are bank loans, banks use their own credit guidelines as though SBA didn’t exist.  So if a bank doesn’t like small business loans, particularly for startups, they are going to underwrite it more strictly (or not at all) and it doesn’t matter whether or not SBA would guarantee it.  It also makes it easy for the bank to tell the borrower that SBA would not approve the loan when in reality the bank wouldn’t approve it and SBA never knew it existed.  The banks have to approve the loan first before SBA sees it when the bank applies for the SBA guarantee.

When I hear people say that they have given up because the SBA keeps asking for paperwork, it is usually the bank asking for paperwork because so few borrowers provide all the required documents the first time.  To receive the SBA guarantee, there a very few extra forms required by SBA that are not already required by the banks.  And even if it is more difficult, if whether or not the small business owner does or does not get a loan based on whether the bank can get a 75% guarantee, is it not worth the extra effort?  Hundreds of millions of dollars in SBA loans are made every year, including startup loans, and it is an excellent source of financing.

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P2P is the acronym for peer-to-peer lending.  The two biggest companies in the P2P universe are Lending Club and Prosper.  What these companies do is crowdfunding of small loans.  In 2013 Lending Club projected loan volume of $2 billion, and Prosper $350 million.  Almost all of the applications are currently for different personal uses such as refinancing credit card debt.

The way it works is that the platforms receive loan applications.  They analyze them using their own proprietary set of algorithms (which continue to grow in sophistication to the point where they soon might be able to tell whether or not you had bacon on that cheeseburger at lunch), and then if they accept the application they put it on their site for investors to invest in.  Investors can invest as little as $25 and can invest in one or several loans.  With luck, a borrower gets the whole loan funded from a “crowd” of investors anywhere in the country who are looking for a rate of return instead of an equity ownership.

Just a tiny fraction of applications to date have been for small businesses, but this is beginning to change – slowly, very slowly.  But as more and more platforms come into the market, the interest in small business loans will start to improve as new business-oriented algorithms come into place.  The door is beginning to crack just a teeny bit.

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Not much.  Of course, it depends on how you define small business.  If you regularly read the business press, when you see the term “small business,” then see how the story describes them (substantial sales and numbers of employees), you see that it is not talking about your neighborhood hair salon/coffee shop/auto repair shop/retailer, and on and on.

For small businesses with sales in the few hundred thousand range which might be successful businesses undergoing strong growth, or startups with experienced management and a good business plan with good prospects, raising equity through crowdfunding is going to be highly unlikely for the near future.

The primary reason is that the SEC and FINRA have not issued their final regulations yet.  And once they do, it is going to take some time for the crowdfunding portals that plan to do business crowdfunding to digest the new rules.  So for the most part, except for more established small businesses, raising money through Reg D offerings, 2014 is pretty much out.

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McKinsey & Co. and Bain & Co. are two of the top global management consulting companies based in the US.  McKinsey focuses on working with companies’ senior management to solve major problems.  It has approximately 9,000 employees in 60 countries.  Bain & Co. provides management consulting advisory services to some of the world’s largest businesses and nonprofits.  It has approximately 6,000 employees in 60 countries.

So is there anything out there for startups and the small businesses in their very earliest stages of growth?  SCORE.  SCORE is one of the resource partners of SBA (the others being the Small Business Development Centers and the Women’s Business Centers).  SCORE has approximately 13,000 volunteer counselors and mentors in approximately 350 offices around the US.  Almost all of the SCORE volunteers are retired or semi-retired business people with 20 and 30 and 40 years’ experience in a wide variety of businesses.  There are former executives of large international companies.  There are many former business owners.  There are chief executives and chief operating officers of international nonprofits.  The list is almost endless.

Whereas only a small percentage of McKinsey and Bain consultants deal directly face-to-face with their clients, almost all SCORE volunteers are front-line management consultants, and because it is a resource partner of SBA, the services are free.  There is never a charge for counseling and mentoring from SCORE volunteers.  It is one of the most remarkable organizations in the country, and it works at the bottom of the ladder with startups and early-stage companies that will be the job-creators of the future.


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