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  Small Business Administration (SBA) Lending Guidelines Bookmark and Share CredFinRisk.com

Please also see the  Corporate Financial Statement Analysis Page   to determine how financial institutions analyze companies. Please also see the Guide To Corporate Taxation Page to determine the tax treatment of business operations.

The U.S. Small Business Administration (SBA) provides financial assistance through:
  • Investment Programs (SBIC Program)
  • Business Loan Programs
  • Disaster Loan Programs
  • Bonding for Contractors
  • The SBA itself is not a Direct Lender. Rather, financing is obtained from an SBA approved Lender (bank and non-bank) and the SBA provides a loan guaranty (against payment default by the Borrower) to the Lender. The Lender pays a Loan Guaranty Fee to the SBA during the term of the loan in exchange for the SBA Guarantee.

    A business does not apply directly to the SBA. Rather, it has to apply at the offices of an approved third party lender or program participant. The relationship is always between the SBA and the Lender, not between the SBA and the Borrower. The SBA guarantee is not extended for the benefit of the Borrower, the guarantee is extended to induce the Lender to make a loan to a business that it otherwise would not consider providing.

    An SBA Lender can be either a bank or a non-bank financial company. SBA-approved lenders include commercial banks, savings and loan institutions, credit unions and finance companies. There are three types of SBA approved Lenders qualifications:
  • Financial institutions just starting in the program or institutions that infrequenly submit applications may submit a loan guarantee application for review to their local SBA office under the regular delivery program. The SBA conducts a separate credit analysis and review of the file and then notifies the lender of its decision (SBA review usually requires 10 business days).
  • Certified Lenders Program (CLP): approved by the SBA District Director after demonstrating that the credit department has a satisfactory performance history with SBA, including the submission of complete and accurate loan guarantee application packages and has an acceptable SBA purchase rate. The paperwork for application is reduced compared to the regular delivery program (the SBA only reviews the lender's credit analysis) and CLPs receive a three-day turn around from the SBA.
  • Preferred Lenders Program (PLP): approved by the SBA Associate Administrator of Financial Assistance after a period of having attained CLP status, after which the SBA delegates loan approval (PLP lenders can approve an SBA guaranty prior to first sending the application to the SBA for review), closing, and most servicing and liquidation authority. Lenders are considered for PLP status based on their record with SBA, and must have demonstrated a proficiency in processing and servicing SBA-guaranteed loans. In the event of payment default by the borrower and the need for enforced collections, the PLP lender agrees to liquidate all business assets before asking SBA to honor its guaranty.
  • What is the advantage to financial institutions to become an SBA-approved Lender?
  • The guaranteed portion of the loan is saleable on an active secondary market which can provide liquidity.
  • The guaranteed portion of SBA loans has a lower risk-based capital requirement.
  • Can provide support for loans with less than optimal collateral coverage.
  • SBA Certified Development Company (504) loans can provide fixed asset financing for up to 90% of the project cost.
  • How does a financial institution become an SBA-approved lender?
  • The process to apply first requires a Resolution of the Board of Directors authorizing the institution to request approval to become an SBA lender.
  • Formal letter of request to the SBA to be considered for approval.
  • The institution’s name, address, telephone number, and contact email address.
  • A copy of the institution’s Articles of Incorporation and by-laws certified by an appropriate officer.
  • Amount of the institution’s capital and additional paid-in capital.
  • A description of the institution's geographical area of operations.
  • A copy of the institution's credit policies and procedures, including loan origination, servicing, and liquidation, and how originations would differ on loans made under the SBA’s loan programs as opposed to those made under the institutions own underwriting criteria alone.
  • A copy of the most recent audited financial statements of the institution.
  • A copy of the resume of the key credit decision personnel, which would include analysts and members of the Loan Committee.
  • A certification (written statement from the institution) indicating that the institution is not a financing subsidiary which engages primarily in financing the operations of an affiliate.
  • A written statement as to why the institution is seeking SBA approval.

  •   SBA Loan Programs
    U.S. Small Business Administration Loan Guaranty Programs include:
  • Section 7(a) Loan Guaranty
  • Certified Development Company (504) Loan Program
  • Microloan 7(m) Loan Program
  • The Small Business Act specifies that the SBA shall not make or guarantee loans for borrowers who are able to obtain credit elsewhere. The statute defines credit elsewhere as “the availability of credit from non-Federal sources on reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.”

    Thus, the SBA will guarantee loans only for applicants for whom the desired credit is not otherwise available on reasonable terms from a nonfederal source. As a result, the SBA requires lenders to explain in a borrower’s loan file why the borrower could not obtain credit elsewhere on reasonable terms.

    Section 7(a) Loan Guaranty Program

    The business must be domiciled within the United States and pay taxes in the United States.

    The business must be an ongoing, for-profit operation.

    The business must indicate how the receipt of the guaranteed financing will also benefit the local community (the guarantee is by a U.S. federal government agency that is funded by taxpayer money and the purpose of the program is that if the business thrives then the community thrives through jobs and the product or service). If the business is not going to create additional jobs, retain jobs or assist in community redevelopment then it is less likely to receive an SBA approval.

    The business must be of a certain size based on either the Number of Employees or Gross Receipts.

      SBA Small Business Size Standards

    Most types of businesses are eligible to apply for SBA 7(a) financing.
    As indicated above, the Small Business Act and 7(a) program regulations give lenders discretion to determine which borrowers cannot obtain credit elsewhere and thus require an SBA guarantee. SBA’s primary guidance for the 7(a) program outlines six reasons lenders can use to substantiate that a borrower cannot obtain credit elsewhere.
  • The business needs a longer maturity than the lender’s policy permits.
  • The collateral does not meet the requirements of the lender’s policies.
  • The lender’s policies normally do not allow loans to new businesses or businesses in the applicant’s industry.
  • Any other factors relating to the credit that, in the lender’s opinion, cannot be overcome without the guarantee.
  • The requested loan amount exceeds the lender’s legal lending limit or policy limit on the amount it can lend to one customer.
  • The lender’s liquidity depends upon selling the guaranteed portion of the loan on the secondary market.
  • Most Lenders assess "availability of credit elsewhere" against their own underwriting standards and the most often cited the reasons for requiring an SBA guarantee are:
  • Borrower’s need for a longer maturity
  • Lack of collateral
  • Age or type of business
  • Essentially, if a borrower does not meet the requirements of the lender’s conventional loan policy, the lender will deny the loan request or require an SBA guarantee.
    SBA 7(a) Loan proceeds can be used for eligible business purposes only:
  • Working Capital (loan term 5 - 7 years)
  • Equipment acquisition (loan term 7 - 10 years)
  • Business acquisition (loan term 10 years)
  • Facilities / real estate acquisition
  • New facilities construction
  • Inventory financing
  • Leasehold improvements (loan term 7 - 10 years)
  • Real estate mortage refinancing
  • Business debt refinancing
    Loan terms from 5 years to 7 years (Working Capital; may not excedd 7 years) to 25 years (Real Estate and Equipment Finance)
    Interest rate structure may be either Fixed interest rate or Variable interest rate.
    SBA 7a Loan Guaranty Program Interest Rate Structure
  • Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums, which are pegged to the Prime Rate or the SBA optional peg rate, which is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan.
  • Interest rates may be fixed or variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25% if the maturity is less than 7 years, and Prime Plus 2.75% if the maturity is 7 years or more.
  • For loans between $25,000 and $50,000, maximum rates must not exceed Prime Plus 3.25% if the maturity is less than 7 years, and Prime Plus 3.75% if the maturity is 7 years or more.
  • For loans of $25,000 or less, the maximum interest rate must not exceed Prime Plus 4.25% if the maturity is less than 7 years, and Prime Plus 4.75%, if the maturity is 7 years or more.
  • The SBA charges lenders a guaranty fee and a servicing fee for each loan approved (and actually disbursed).
  • The amount of the fee is applied on the SBA guaranty portion of the loan (not the full disbursed amount).
  • The lender may charge the upfront guaranty fee to the borrower after the lender has paid the fee to the SBA and has made the first disbursement of the loan.
  • The lender's annual service fee to SBA cannot be charged to the borrower.
  • SBA fee structure:
  • For loans of $150,000 or less, a 2.0% guaranty fee will be charged. Lenders are again permitted to retain 25% of the up-front guarantee fee on loans with a gross amount of $150,000 or less.
  • For loans more than $150,000 but up to and including $700,000, a 3.0% guaranty fee will be charged.
  • For loans greater than $700,000, a 3.5% guaranty fee will be charged.
  • For loans greater than $1,000,000, an additional 0.25% guaranty fee will be charged for that portion greater than $1,000,000. The portion of $1,000,000 or less would be charged a 3.5% guaranty fee. The portion greater than $1,000,000 would be charged at 3.75%.
  • The servicing fee for all 7(a) loans is 0.494% of the outstanding balance of the guaranteed portion of the loan (which remains in effect for the term of the loan).
    The SBA will guarantee a certain percentage of a 7 (a) loan based on the loan amount. Typically, the SBA will participate in loan requests of up to $2,000,000. The SBA would guarantee up to 75.0% of the loan ($1.5 miilion), and will provide a 75% guaranty on loans of $150,000 or more; and will provide an 85.0% guaranty for loans of $150,000 or less.

      SBA 7(a) Loan Guaranty Program

    The SBA has informed lenders that the SBA portion of a real estate financing / refinancing may no longer be in a second lien position.

    There are 2 Standard 7a Loan Guaranty Processing Centers (LGPC):

    6501 Sylvan Road                                        262 Black Gold Blvd
    Citrus Heights , CA 95610                             Hazard, KY 41701
    Phone: (916) 735-1515 ext. 4368                  Phone: (606)436-0801
    Fax: (916) 735-1554 or                                Fax: (606)435-2400
    Fax: (916) 735-1680

    504 Loan Program

    The Applicant Must be a "small business" as defined by the SBA and meet owner occupancy requirements. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years.

      SBA Small Business Size Standards

  • Funds received under the 504 Loan Program is restricted in usage for the acquisition financing, construction, upgrade / renovation or refinancing of real estate or long-term fixed assets (machinery and equipment purchases).
  • Property must be owner-occupied.
  • Minimum 10% downpayment from the principals (that is the advantage of the program as most commercial real estate acquisitions usually require 20% to 35% down payment).
  • Generally, a 504 loan may not exceed 40.0% of total Project cost plus 100 percent of eligible administrative costs.
  • The interest rate on 504 loans is pegged to an increment above the current market rate for corresponding 5-year and 10-year U.S. Treasury issues.
  • The SBA 504 loan program can also be utilized as a financing option for franchisees (acquisition).

    Franchise Registry   www.franchiseregistry.com/

    Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

    Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

    The business must indicate how the receipt of the guaranteed financing will also benefit the local community (the guarantee is by a U.S. federal government agency that is funded by taxpayer money and the purpose of the program is that if the business thrives then the community thrives through jobs and the product or service). If the business is not going to create additional jobs, retain jobs or assist in community redevelopment then it is less likely to receive an SBA approval. The SBA indicates that with regard to CDC / 504 loans the generally, "a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal."

      CDC / 504 Loan Guaranty Program

    Typical SBA 504 loan structure:
  • 50% Senior Debt provided by the private financial institution.
  • 40% Sub Debt provided by a Certified Development Company (CDC; funded by a 100% SBA-guaranteed debenture; junior lien).
  • 10% equity contribution from the principals.
  • Certified Development Company (CDC) is a development company usually set up by a local municipal government in partnership with local business groups and financial institutions. With regard to purely economic issues a CDC will assist with the revitalization of commercial districts and also assist with long-term planning (non-commercial programs include housing for low-to-moderate income families, operate child-care programs, provide literacy training, etc.). CDCs are usually funded through grants and state funding and many operate with federal 501(c)(3) tax-exempt status. The SBA 504 loan program is also sometimes referred to as the Certified Development Company Economic Development Loan Program.

    The CDC will participate up to 40% of the loan to a maximum amount of $1,500,000 (the maximum SBA debenture). The SBA 504 portion can be amortized over 10 or 20 years terms with a fixed below-market rate. SBA 504 real estate financing is 20-year, fully amortized financing. Please note: CDCs can go as high as $2,000,000 of SBA 504 financing for public policy or community development projects and up to $4,000,000 for eligible manufacturing projects.

    National Association of Development Companies (NADCO)   www.nadco.org/

    SBAExpress Loan Guaranty Program

    The lender must have an SBAExpress Supplemental Loan Guaranty Agreement between lender and SBA in place.

    For loans with a maturity of more than 12 months, the lender must pay a guaranty fee of 2.00% of the amount guaranteed for loans of $150,000 or less, and 3.00% for loans of more than $150,000 to the Small Business Administration, Denver, CO 80259-0001, within 90 days of the date of an SBA Authorization. For loans with a maturity of 12 months or less, the lender must pay a guaranty fee of 0.25% of the amount guaranteed to the same address within 10 days after the SBA issued the SBA Loan Number.

    The lender must comply with current SBA Form 750.

    The borrower must complete the SBAExpress Borrower Information Form 1919   http://archive.sba.gov/idc/groups/public/documents/sba_homepage/tools_sbf_finasst1919.pdf


    Patriot Express Loan Guaranty Program

    The Patriot Express loan (which is part of the 7a Loan Guaranty Program) can be used for most business purposes, including start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.

    Maximum loan size of $500,000 (the SBA has limited the number of loans above $350,000 to 2,000, through the year 2010, in order to focus the loan program toward smaller loans).

    Patriot Express maximum interest rates will range from Prime Rate + 225 bp to Prime Rate + 475 bp depending upon the size and maturity of the loan. Interest rate structure may be either Fixed interest rate or Variable interest rate .

    This is a 75% - 85% loan guaranty program: loans of $150,000 or less may receive a maximum guaranty of 85% and loans in excess of $150,000 (up to $500,000) may receive a maximum guaranty of 75%.

    Borrower eligibility is limited to businesses that meet SBA’s standard eligibility requirements and that are at a minimum 51% owned by an individual(s) in one or more of the following groups:
  • Veterans (other than dishonorably discharged).
  • Service-Disabled Veterans.
  • Active Duty Military service member participating in the military’s Transition Assistance Program (TAP), which is applicable to potential retirees within 24 months of separation and to discharging Active Duty members within 12 months of discharge.
  • Reservists and National Guard members.
  • Current spouse of above, widowed spouse of a service member who died while in service, or widowed spouse of a veteran who died of a service-connected disability.
  •   SBA Patriot Express Loan Guaranty Program

    Community Express Loan Program

    The Community Express Pilot Loan program (which is part of the 7a Loan Guaranty Program) was originally designed for minority-, women- and veteran-owned small businesses located in low- and moderate-income areas identified under the SBA’s Historically Underutilized Business Zones (HUBZones) and those communities identified as distressed through the Community Reinvestment Act (CRA). In addition, to encourage small businesses start-ups, SBA also makes eligible loans of $25,000 or less for Community Express, regardless of where small businesses are located.

    Community Express loans must meet the basic 7(a) loan criteria.

    Maximum loan size of $250,000. Revolving lines of credit may have a maturity of up to 7 years.

    Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans from $25,000 to $250,000.

    Lender must provide and ensure that the borrower receives appropriate technical assistance (T/A) but may use SBA’s Small Business Training Network (SBTN) and/or other SBA T/A resources to fulfill T/A requirements. Lender must document provision of T/A in loan file.

    Community Express is a pilot program, under law its loan volume is capped: all SBA Pilot Programs are Limited to 10% of the Number of 7(a) Loans. There have been some concerns by the SBA with regard to predatory lending practices. In addition, loans originated through Community Express program have a 7% default rate, the highest of all SBA loan programs, while the 7(a) loan program has an overall default rate under 3%.

      SBA Community Express Loan Guaranty Program

    Microloan 7(m) Program

    The Microloan Program provides very small loans to start-up, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers.
  • Maximum loan amount of $35,000.
  • Maximum term allowed for a microloan is six years.
  • Under the terms of the Microloan Program, the SBA allows each intermediary lender to have its own lending and credit requirements. However, as a general rule collateral and the personal guarantee of the business owner is required.
  • Borrowers must also enroll in a business based training and technical assistance program provided by the financial institution.
  •   SBA Microloan Program

    SBA Loan Underwriting / Credit Analysis

    The relationship and guarantee that the SBA provides is between the SBA and the Lender and not between the SBA and the applicant / borrower. The Lender must utilize generally accepted credit analysis standards and guidelines to qualify the loan. The fact that there is going to be an explicit guarantee does not in of itself qualify the loan nor should it influence the Lender to extend the loan. Rather, the business must clearly demonstrate the ability to service and repay the loan.

    The first analysis of the application is to determine if the applicant would qualify for a non-SBA guaranteed loan.

    The SBA does not deny approval for a SBA Guaranty Loan solely due to lack of collateral.

    All owners of twenty percent (20%) or more of the business are required to personally guarantee SBA loans.

    A business / individual that has recently been charged with having committed a felony or defaulted on any previous government debt is ineligible for SBA financing.

    Within the 7(a) program, there are several delivery methods—including regular 7(a), the preferred lender program (PLP), and SBAExpress. Under the regular (nondelegated) 7(a) program, SBA makes the loan approval decision, including the credit determination. Under PLP and SBAExpress, SBA delegates to the lender the authority to make loan approval decisions, including credit determinations, without prior review by SBA. The maximum loan amount under the SBAExpress program is $350,000 (as opposed to $2 million for other 7(a) loans). The program allows lenders to utilize, to the maximum extent possible, their respective loan analyses, procedures, and documentation. In return for the expanded authority and autonomy provided by the program, SBAExpress lenders agree to accept a maximum SBA guarantee of 50 percent.

    SBA Loan Secondary Market

    Lenders are permitted to sell the guaranteed portion of 7(a) loans on the secondary market pursuant to 13 C.F.R. Part 120, Subpart F.

    The secondary market for small business loans declined substantially after the development of the credit crisis in the thrid quarter 2008, On March 16, 2009, the U.S. federal government indicated that as part of the American Recovery and Reinvestment Act economic stimulus plan the Treasury Department would purchase securities backed by the guaranteed portions of 7(a) loans packaged since July 2008 through December 31, 2009.

    In the United States there is a private on-line exchange that allows business owners, lenders (who may have originated a commercial loan but are not going to fund it), business brokers, loan packagers and franchisors to present loans to lenders for potential SBA financing (primarily 7a loans).

      Small Business Operations

    Business Licensing

    In the United States certain types of businesses need to be licensed, certified or registered (includes but is not limited to):
  • Asbestos Safety Technician
  • Auctioneer
  • Child Care Centers
  • Cigarette & Motor Fuel Seller
  • Employment Agency including Temporary Employment, Nurse Registry, Home Health Aid, etc.
  • Funeral Home
  • Hair Salon / Barber / Cosmetology
  • Health Care Facility / Service
  • Home Improvement Contractors & Landscapers
  • Lead Hazard Abatement Contractor
  • Limousine or Taxi Service
  • Liquor Sales
  • New Home Builder Registration and Renewal
  • Pesticide Applicator / Operator
  • Private Investigator
  • Public Accountant
  • Real Estate Agent / Appraiser
  • Restaurants and Food Preparation for Retail Sale
  • Solid Waste Transporter
  • Telemarketing Companies
  • Some municipalities also have zoning regulations against the operation / location of a business within a residential area. If your business operates in violation of them, you could be fined or shut down. (Consult an attorney)

    Some states also have restrictions against certain products being manufactured / fabricated in in or at a residential property. Most states restrict the home production of fireworks, drugs, poisons, explosives, sanitary or medical products and toys. Some states also prohibit home-based businesses from making food, drink or clothing. (Consult an attorney)

    Business Legal Structures

    Types of business legal structures
  • Sole Proprietorship - A business owned and managed by one individual who is personally liable for all business debts and obligations.
  • Partnership - Two or more people share ownership of a single business.
  • Corporation - A legal entity owned by shareholders.
  • S Corporation - A special type of corporation created through a tax election. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation.
  • Limited Liability Company (LLC) - A hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership
  • Limited Liability Partnership (LLP) - Usage of this option may be restricted in some states to licensed professionals such asaccountants, lawyers, and architects.
  • Not for Profit - An organization engaged in activities of public or private interest that are motivated by making a profit. Some non-profits are exempt from paying federal taxes.
  • Cooperative - A business or organization owned by and operated for the benefit of those using its services. Cooperatives are not a legal structure.
  • Federal Employer Identification Numbers (EIN) are required by all businesses with employees, including sole proprietorships, or if you operate as a corporation or a partnership.

      Employer ID Numbers (EINs), Internal Revenue Service

      How to Apply for an EIN, Internal Revenue Service

    In order to open a bank account, a corporation and/or LLC must ususally provide their bank with a copy of the entity's articles of organization (also known as a certificate of formation in some states), and the acknowledgement / approval of incorporation from the Department of State of the respective state in which the business is domiciled. Some banks may also require that the entity have an official seal.

    Patents & Trademarks

    If you are manufacturing / fabricating a product that you originally designed then it worth the effort, time and expense to have the design patented and then engage a service that monitors the patent. You must also make sure that there are no unauthorized distributors of your product, especially if those that are selling the product at the retail or wholesale level at prices lower than your authorized distributors.


    E-Verify is an Internet based system operated by the Department of Homeland Security (DHS) in partnership with the Social Security Administration (SSA). The service is free and voluntary and allows participating employers to electronically verify and confirm the employment eligibility (legal working status) and the the validity of the Social Security Number of their newly hired employees.


    Business Operations

    Another challenge is getting customers to pay your invoice in a timely manner and that their payment is good. When bounced check payments are too small for Small Claims Court or for a collection agency then one may have to contact the local District Attorney's office. One may also sign on with (for a fee) a private check service program that will approve and guarantee payments by check.

    Contrary to popular belief, the U.S. Department of Labor indicates that there is no federal law that requires a coffee break or a lunch break. However, it is really good operating policy to provide one but each company is free to regulate the time provided for such breaks.

    Health Care

    Self-mployed persons and their employees may have a Health Savings Account (HSA) as long as they are enrolled in a qualified high deductable health plan (HDHP) with a minimum deductable of $1,100 for individuals and $2,200 for families, and are not covered under another health plan (including Medicare). An employee's contributions are tax deductable and the unused balance in the HSA at the end of the year may be rolled over into the next calendar year. There is no requirement that an employer match an employee's contribution into their HSA.

    How to Market a Business

    One of the most important functions of a business is finding customers. How do you market a business effectively, cost effectively and find customers? Secondly, how do you get the customer to agree to placing an order or hiring the service and then pay for it?

    Select specific markets (market segmentation) to serve, which is the same as asking who are your target customers? The product or service may be applicable to several different types of businesses and this requires very good research. Do you also need to go outside of your immediate geographical area? Can you discern any type of change in attitudes or developing trends (for instance, people trying to eat healthier food) that you can serve?

    To connect with a customer figure out how to satisfy their needs. That means taking a good, long look at them and determine what their competitive advantage(s) are and how does your product or service assist them to meet their objectives. Essentially: how are you going to help tham make money or solve a problem? Again, are there change in attitudes or developing trends that you can assist them address? Do you need to tailor your company's product offerings or service, prices, or distribution to accommodate the customer? Admittedly, it is very difficult to determine needs which currently are not being met in the market place but that is the key to success.

    What are some of the most effective and cost effective marketing tools to create name awareness?
  • Mail out glossy postcards.
  • Distribute descriptive handouts.
  • Have a party on the premises of the business.
  • Direct cold calling.
  • Website that is correctly coded for "keywords" relative to the business; The site should also be used for brand building and for informational purposes.
  • Guerilla marketing, which sometimes may mean activities that are not actually legal or may pose a threat to public safety.
  • The purchase of mailing lists from list brokers, magazines, or other companies can be fairly expensive, especially after factoring in the cost to contact the persons / companies on the list.

    Some traditional texts on marketing always refer to the Marking Mix
  • Products and Services - narrow product line, developing a highly specialized product or service or providing a product-service package containing an unusual amount of service
  • Promotion - high quality salesmanship vs. bulk advertising
  • Distribution - the need to sell through distributors or manufacturers' agents
  • Pricing - price levels and/or pricing policies requires experience of actually selling the product or service
  • Physical location is very important: high traffic and visibility are critical for certain types of services and products. However, location is less of a concern for products or services that customers are willing to go out of their way to locate or the business sells on-line. Secondly, there is an issue of cost: the greater the traffic and visibility (for instance, a shopping mall) the higher the rental expense.

    Good customer service is essential to retaining customers. Once you have a customer make sure that you are available by telephone, listen carefully to what they are saying and provide a rapid response to questions or requests.

    It is very important to know who your competitors are and what are their strategies. What does it appear that they are doing correctly or incorrectly and what can you learn from that? How do / can you serve customers better than the competition?

    How to Write a Business Plan

    Do not confuse a Business Plan with a Financing Proposal. The Business Plan is the outline of how the business will be organized, what the goals are, what activities will engaged in and carried out in order to achieve those goals, and how the business wil be managed and operated. The Financing Proposal is prepared for a potential lender and it includes the Business Plan and then indicates the amount of financing that is being sought, how it will be utilized and how it will be repaid. The Business Plan is written before the business starts or is entering a new market or product line. The Financing Proposal is always written after the Business Plan.

    There are some general guidelines but a Business Plan always has to customized for the specific business functions and specific business objectives. Please note with regard to the writing style of the plan: leave out the superlatives and most adjectives.

    I. Cover Page
  • Provide the company's name, address, and contact information along with owner name(s) and contact information for the primary contact.
    II. Table of Contents
  • I. Cover Page
  • II. Table of Contents
  • III. Executive Summary
  • IV. Company Description
  • V. Management
  • VI. Product or Service
  • VII. Industry Analysis
  • VIII. Market Analysis
  • IX. Organizational Structure
  • X. Financial Condition / Statements and Projections
  • XI. Addendum (Supporting Documentation)
    III. Executive Summary
  • Summarizes the Business Plan in two pages or less and provides basic information about the company.
    IV. Company Description
  • What does the company do?
  • Description of the product(s) and / or service(s) of the company.
  • Location, physical operation and / or facilities of the company (leased or owned).
  • Brief history of the company and idea behind or reason for starting the operation.
  • Legal structure of the company.
  • Owners and personnel of the company.
  • How was the company initially capitalized to start-up operations?
  • What are the goals of the company and does it fit into a time frame?
  • Is there any required licensing, bonding, permits, insurance, zoning, government regulations, patents, trademarks, copyrights? How was this researched and how has it been handled?
    V. Management
  • Who are the key personnel and what is their background and qualifications?
  • What are their duties / function?
    VI. Product or Service
  • An in-depth analysis of the product or service:
  • What does the product or service do?
  • How is it manufactured or provided?
  • What tools or equipment is necessary to complete the product or service?
  • Are outside suppliers necessary?
  • How is the product or service priced?
  • If other components or services are necessary to complete the product or service how are they sourced and what is the cost?
  • How is the product or service distributed?
  • How is the product or service warranted or serviced once it is sold?
  • What differentiates the product or service from similar products or services?
    VII. Industry Analysis
  • Where does the product or service fit into the world?
    VIII. Market Analysis
  • Who are the customers? (location, size, description)
  • What is the existing demand for the product or service and what is the forecasted demand?
  • How are customers located, contacted, marketed to?
  • Is there a pricing policy for different types of customers?
  • How is the company, product or service promoted or advertized?
  • Who are the competitors? (location, size, description)
  • How easy or hard is it for other competitors to enter the industry?
  • Is it possible to team with a dissimilar or similar company to sell the product or service?
    IX. Organizational Structure
  • How many employees are required?
  • What skills are necessary?
  • What are employee / personnel policies?
  • How much inventory is necessary and how will it be utilized and valued?
  • Who are the major suppliers and what is their condition, service quality and reliability?
  • What are the terms that suppliers extend?
  • What is the company's credit policy?
  • Does the company rely upon outside attorney, accountant, payroll, insurance agent, and advisory services?
    X. Financial Condition / Statements and Projections
  • Initial capital investment amount and source.
  • Start-up expenses including inventory purchase, tools, equipment, rent, marketing.
  • Year-to-date income statement and balance sheet.
  • Previous year(s) tax returns.
  • Profit and loss projection (Income Statement) on a monthly basis for the next 12 months (including a detailed explanation of assumptions used to develop the projection).
  • Cash flow projection on a monthly basis for the next 12 months indicating how and when cash will flow in and out of the business (including a detailed explanation of assumptions used to develop the projection).
  • Projected balance sheet within 12 months.
    XI. Addendum (Supporting Documents)
  • Incorporation / Articles of organization documentation.
  • Personal resumes for owners and management.
  • Copies of certification of the personnel related to the ability / qualifications for manufacturing the product or providing the service.
  • Letters of reference<./li>
  • Personal financial statements from all principals.
  • Contracts and/or letters of intent from suppliers and / or customers.
  • Copies of leases, licenses, permits, or any other legal documents.

  • As indicated above, a Financing Proposal would include a section titled Financing Request, which would be inserted perhaps just after the Executive Summary. The proposal would cover the amount requested, an accurate estimate of the rate and terms, collateral (if any), how the loan will be utilized, how the loan would be repaid, and the owner's equity contribution to the company (to demonstrate that the principal is also willing to risk their own funds / assets). A loan applicant's chance of approval increases substantially with the submittal of a concise plan rather than just assembling documentation and then placing the financial institution in the position that they have to figure everything out on their own

    Bank Loans

    Some of the key issues that a small business owner must keep in mind when obtaining a loan from a bank is that:
  • Bank loan documentation usually includes wording indicating that the granting and / or renewal of the loan is "at the discretion of the bank". This means that the bank can decide to call the loan (the loan is now due and the entire outstanding balance must be repaid in full) either at maturity or even while the loan is outstanding. It does not matter whether the borrower has made all monthly payments on time and in full.
  • Most small business loans also require that the owner / borrower (an any other borrowers) sign a personal guarantee. This means that if there is a default by the small business borrower then the personal assets (personal residence, personal belongings, bank accounts, insurance policies) of the business owner can also be sought by the bank for the full repayment of the loan.
  • If there is more than one business owner then each party must sign a joint and several liability agreement. This means that in the event of a default the bank may pursue all owners / partners or it may just pursue the one with the most assets.
  • The spouse of a small business owner may also have to sign a Spousal Consent Agreement. This means that the spouse of the small business owner is agreeing to the loan and the bank's ability to pursue any jointly-owned assets in the event of a default.

  • Alternative Financing

    Merchant account cash advance services provide financing to small businesses and obtain repayment from from the merchant's monthly credit card (Visa, MasterCard, American Express and/or Discover) dollar sales amount. The cash advance company usually enters into an arrangement with the credit card processing service to have the amount collected directly. Typically, there is no fixed payment schedule. Rather, the monthly payment includes a premium, which equates to an interest cost of money. The cash advance company usually advances a percentage of the monthly credit card processing average balance (there is usually a minimum monthly average requirement). The advance term is usually six months to one year, and can be extended again as long as the first advance was paid as agreed. The advantage to the business owner is that the application requirements are low: no tax returns, no financial statements, no application fees, just copies of the monthly report from the credit card transaction processors. The advantage to the cash advance company is that the premium charged with the monthly payment is substantial, usually in excess of commercial credit card rates and certainly higher than traditional loans from a financial institution. The largest company in the industry is AdvanceMe (a wholly owned subsidiary of Capital Access Network), and the industry as a whole advances just under $1 billion per annum to U.S. businesses.

    Chamber of Commerce

    A local or regional chamber of commerce can assist all size and type of businesses with locating customers and suppliers, services directory, licensing and tax issues, local promotions, partnerships, advice and support, and available resources.

    Directory of U.S. State, Regional, County and City Chambers of Commerce

    U.S. Small Business Information Sources

    Alaska Division of Corporations, Business, and Professional Licensing   www.commerce.state.ak.us/occ/home.htm

    Alaska Office of Economic Development: Small Business Development   www.commerce.state.ak.us/oed/smallbus/home.cfm

    American Association of Franchisees and Dealers   www.aafd.org/

    Arizona Small Business Association (ASBA)   www.asba.com/

    Arkansas Small Business and Technology Development Center   asbdc.ualr.edu/

    Florida Small Business Development Center   www.floridasbdc.com/

    Florida State Business Portal   www.myflorida.com/taxonomy/business/

    FRANdata Franchise Registry   www.franchiseregistry.com/

    Hawaii Department of Business, Economic Development & Tourism   hawaii.gov/dbedt

    Illinois Department of Business Services   www.sos.state.il.us/departments/business_services/home.html

    Internal Revenue Service, Small Business and Self-Employed One-Stop Resource   www.irs.gov/businesses/small/index.html

    Iowa Business & Economic Development   www.iowa.gov/state/main/business.html

    Iowa Small Business Development Center   www.iowasbdc.org/

    Kansas Business   www.state.ks.us/business/

    Missouri Merchants & Manufacturers Association (MMMA)   www.mmma.org/

    Missouri Small Business Advocacy Center   www.sos.mo.gov/business/sbac/

    National Association of Development Companies (NADCO)   www.nadco.org/

    National Business Association (NBA)   www.nationalbusiness.org/

    Nevada Department of Business & Industry   dbi.state.nv.us/

    Nevada Small Business Development Center   www.nsbdc.org/

    New Jersey Business Portal   www.nj.gov/njbusiness/

    Occupational Safety & Health Administration (OSHA), U.S. Department of Labor   www.osha.gov/

    Social Security Department, Employer W-2 Filing Instructions & Information   www.socialsecurity.gov/employer/

    SBA Financial Assistance Forms   www.sba.gov/tools/Forms/smallbusinessforms/fsforms/index.html

    SBA Forms   www.sba.gov/aboutsba/sbaprograms/elending/lgpc/forms/index.html
    Alternative SBA Forms www.sba.gov/tools/Forms/SBApartnerforms/lenderforms/index.html

    SBA Franchising Strategy   www.sba.gov/content/franchising-strategy

    SBA Local Resources   www.sba.gov/localresources/index.html   (locate a district office)

    SBA Small Business Planner   www.sba.gov/smallbusinessplanner/index.html

    Small Business Association of Michigan (SBAM)   www.sbam.org/

    Smaller Business Association of New England (SBANE)   www.sbane.org/

    Small Business California   www.smallbusinesscalifornia.org/

    Texas Business and Consumer Services   www.state.tx.us/category.jsp?language=eng&categoryId=2

    United States Patent and Trademark Office (USPTO)   www.uspto.gov/

    Virginia Department of Business Assistance   www.dba.virginia.gov/

    Washington State Department of Licensing   www.dol.wa.gov/business/


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