Small Business Funding and SBA Loans in Texas - How Do They Work?

The place to turn for superior information and help regarding funding for a start-up business in Texas is DRDA, P.C., at www.drdacpa.com. When it comes to financing a small business, there are more options than a person may think.  In addition to the cutting edge methods of the BORSA Plan, whereby you can legally withdraw money from your 401(k) plan, many small business owners seek a loan via the Small Business Administration, or SBA.  Contact the expert business consultants at DRDA, P.C. at (281) 954- 6040 today to find out how they can help you understand all that goes into the money aspect of your small or start up business.

About SBA Loans

• The SBA is Not a Lender

When you apply for a small business loan through the SBA (Small Business Administration) the first thing you need to understand about the funding of your loan is that the SBA is not your lender. The function of the SBA is to guarantee the lender a percentage of the loan in the event of default by the borrower. The lender works with the SBA in order to make it easier for a borrower to qualify for the loan.  

Many small businesses have trouble getting a loan for start up purposes. Banks and other lenders are often hesitant to finance start-ups due to the high number of small businesses that fail. Often, a bank sees the loan as too large a risk to take alone. When the SBA steps in and offers to guarantee up to 85% of the loan, substantially reducing the risk to the lender. When a financial institution does agree to finance an SBA loan, they must also agree to the terms and conditions the SBA puts on the loan agreement.  

Once the SBA approves the guaranty of the loan, the lender must sign an authorization contract with the SBA. The borrower does not sign this document; the lender is responsible for compliance with the SBA requirements in order to keep the guaranty in effect. The lender uses a Boilerplate document provided by the SBA and has several specific conditions to meet for the guaranty.  

• The Lender Does the Paperwork

The amount of paperwork involved in the authorization of an SBA loan can be staggering, as the Standard Operation Procedure document regulating the processing of SBA loan requests is 745 pages long. The good news for the borrower though, is the responsibility for following these procedures is on the financial institution.

The lender must prepare all the necessary documents and have them signed by all borrowers. The lender is also responsible for making sure that all collateral and liens follow the necessary laws and requirements. Everything must be documented, including the disbursement dates of the funds. The lender, also in accordance with the SBA regulations and boilerplate document, determines all terms of the loan.  

Proceeds from an SBA loan must be used for clear and specific purposes. The lender, not the SBA, must be sure that the borrower uses the loan funds in compliance with restrictions. Loan funds cannot be used to pay or reimburse the principals of the loan. The loan must benefit the business. It cannot be used to pay back taxes of any kind.  

Often, the SBA will require an equity injection from the borrower before they will disburse the loan. It is up to the lending institution to make sure this equity injection has been made and they will require a copy of the check or escrow settlements sheet verifying the equity injection amount. One of the most common reasons the SBA denies the guaranty of a loan is the lender does not have complete and proper documentation of this necessary equity injection by the borrower.  

The borrower must obtain several types of insurance before the lender disburses the loan. Flood insurance, hazard insurance, workers compensation insurance and at times life or disability insurance must be obtained on the business. There may be other insurances needed also, depending upon the nature of the business or goods sold by the business. The financial institute must also verify tax return information, various documents regarding the legal entity of the business, as well as various other possible requirements dependent on the business that is receiving the loan.