SBA Loan Access: A Trojan Horse?

As part of the Department of Defense Appropriations Act, 2010, which was signed into law on December 19, the Small Business Administration received $4.5 billion in additional funding through February 28, 2010. This funding enables the SBA to raise its guarantee to 90% on loans made by commercial lenders to small business owners and to waive fees on two popular loan programs—7a and 504 loans.

Sounds like this was a good holiday gift to small business? It’s not bad, especially for about 1,000 businesses already on a waiting list for loans, but let’s take another look at this gift horse. 

Many small businesses today are no longer in the market for loans; they could have used them when the economy started to go south. Now, they don’t have the customers or revenue to support the growth that the loans would otherwise have been used for. Some of the businesses that do want loans now may no longer qualify (or at least qualify at affordable interest rates) if the business’s and owner’s credit ratings were severely damaged in the recession.

Looking ahead, even companies positioned to benefit from the loans may want to rethink the entire concept of borrowing. If the recession taught us anything, it’s that having cash, not debt, is the way to survive and prosper. Debt means incurring monthly interest costs and requires regular cash outlays to service the debt. When inflation takes off, it means higher interest rates and a steeper cost of borrowing.

Better ways to finance business projects may be:

  • Vendor financing to acquire inventory, machinery, and other items needed by your business—this borrowing is limited, short term, and usually available on attractive terms.
  • Retained earnings to self-finance any projects—this is a no-cost financing option.

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