Big Cash for Small Businesses

Jump-start your clients, with help from the SBA.

  • ALTHOUGH SBA-GUARANTEED bank loans are a low-cost alternative to traditional financing sources, a variety of programs exist and the application process can be complex.
  • AN ESTIMATED 99% of all U.S. businesses are small enough to fall within SBA guidelines. Specific rules vary from one type of business to another.
  • THE 7(A) GUARANTEED LOAD program is suitable for many businesses for expansion, purchasing machinery, refinancing existing business debt and other purposes.
  • THE SBA OFFERS THREE NEW LOAN PROGRAMS: LowDoc has a greatly simplified process to get $150,000 or less. The export working capital program helps small companies in the export business, while the Y2K action loan program helps address the Y2K computer problems facing small businesses.
  • THE SBA REQUIRES APPLICANTS to work with an SBA-approved bank. Applications have to describe the business and give exhaustive financial details, including a projected income statement. Established companies need to provide current balance sheets for the business as well as personal balance sheets of principal owners.
  • THE SUCCESSFUL APPLICANT needs to demonstrate cash flow, management ability and a certain amount of equity in the concern. Collateral also is required. However, the SBA does show some flexibility in its guidelines.
HENRY WICHMANN, JR., CPA, PhD, is professor of accounting and head of the Accounting and Information Systems Department, School of Management, University of Alaska, Fairbanks. His e-mail address is .

CHARLES HARTER, CPA, PhD, is an associate professor of accounting, College of Business Administration, North Dakota State University, Fargo. His e-mail address is .

H. CHARLES SPARKS, CPA, PhD, is an assistant professor of accounting, also at the management school at UAF. His e-mail address is .

The authors thank Edwin G. Sleater, chief of Finance Division, SBA District Office, in Anchorage, Alaska, for his assistance in preparing this article.

y guaranteeing bank loans to small businesses, the SBA can help turn a struggling start-up into a viable enterprise or allow an established business to reach new heights. SBA loan interest rates often are lower than those small businesses would pay for conventional loans and fees usually are affordable. But the devil is in the details: Which SBA program is right for a given company? How much money is available and how is it guaranteed? What kind of information does the SBA want to see before making a decision? CPAs who are already providing various consulting services to their clients may have overlooked the added business opportunities that helping these clients evaluate and secure loans offer. But those CPAs who can navigate the SBA process also can add value to their client relationships.


“Small,” according to the SBA, still can be pretty large. The SBA defines a small business as an entity “independently owned and operated and which is not dominant in its field of operations.” It also must conform to the SBA’s guidelines for the number of employees and dollar volume. Nevertheless, approximately 99% of all businesses qualify. Small businesses include

  • Retail and service entities with annual receipts (or sales) up to $13.5 million.
  • Agricultural businesses with annual receipts (or sales) up to $3.5 million.
  • General contractors with annual receipts (or sales) up to $17 million.
  • Specialty contractors with annual receipts (or sales) up to $7 million.
  • Wholesalers with 100 or fewer employees.
  • Manufacturers with up to 1,500 employees.

The SBA has further eligibility criteria based on the nature of the business and how that business will use the borrowed funds. For example, a business cannot use the loan to encourage monopoly, speculation, gambling or multilevel sales distribution plans. Ordinarily, the business should be organized as a profit-making rather than as a not-for-profit enterprise. It must have all required state and local licenses. In general, SBA-guaranteed loans must be in the public interest and not infringe on anyone’s personal rights. The following are examples of businesses not eligible for SBA loans:

  • Businesses able to obtain financing on reasonable terms from other sources.
  • Concerns primarily engaged in speculation and investments (such as the purchase of rental property).
  • Nonprofit enterprises (except sheltered workshops).
  • Businesses obtaining loans to pay off creditors that can sustain losses.


There’s a good chance the SBA’s popular 7(a) guaranteed loan program will suit your small business client (see exhibit 1). Under this program, a bank agrees to make the loan contingent on the SBA’s approval of the guarantee. The SBA may guarantee up to 80% on loans of $100,000 or less. Loans greater than $100,000 may receive a maximum guaranty of 75%, not to exceed $750,000. The bank then can improve its profitability and liquidity by selling the guaranteed portion on the secondary loan market, thus providing the bank with additional funds to lend to other borrowers.

The business negotiates the loan term with the bank, subject to certain SBA limits. SBA-guaranteed bank loans usually have longer terms than conventional bank loans: The maximum term is 25 years for fixed-asset loans, while working capital loans usually are limited to 7 years but may go up to 10.

SBA-guaranteed loans may have lower interest rates than conventional bank loans for comparable risks. Interest rate limits set by the SBA are pegged to the New York prime rate as published in the Wall Street Journal. Currently, the SBA restricts rates to 2.25% over prime for loans of less than 7 years and prime plus 2.75% for loans maturing in 7 years or more. At the bank’s option, the note may have a variable rate that is adjustable monthly following the prime rate. In recent years, nearly all of the SBA’s guaranty loans have had variable interest rates.

The SBA charges a one-time fee on the guaranteed portion of loans. For loans where the guaranteed portion is $80,000 or less, the guaranty fee is 2%, payable by the borrower within 90 days or on first disbursement, whichever comes first. For guarantees exceeding $80,000, the fee is 3% of the portion up to $250,000; 3.5% on the next $250,000; and 3.875% on the next $250,000. The bank also may charge loan packaging and servicing fees.

SBA borrowers face certain restrictions regarding use of loan proceeds. However, most legitimate business purposes qualify. Loan proceeds cannot be used for distribution to owners or principals or for payment of personal debt. A CPA’s clients may want to use SBA loans to

  • Expand, renovate or purchase a business.
  • Purchase machinery, fixtures and leasehold improvements.
  • Finance accounts receivable and augment working capital.
  • Refinance existing business debt.
  • Finance seasonal lines of credit.
  • Construct commercial buildings.
  • Purchase land or buildings.
Exhibit 1: SBA Guaranty Loan Programs
Program Function Customer Delivered by
7(a) loan guaranty Section 7(a) of the Small Business Act authorizes the SBA to guarantee loans to small businesses that cannot obtain financing on reasonable terms through normal lending channels. The program is designed to promote small business formation and growth by guaranteeing long-term loans to qualified companies. Loans are available for many purposes, such as real estate, expansion, equipment, working capital or inventory. The SBA can guarantee 75% of the loan amount up to $750,000. For loans of $100,000 or less, the guaranty rate is 80%. The interest rate is not to exceed 2.75% over the prime rate. Maturities are up to 10 years for working capital and up to 25 years for fixed assets. Small businesses Commercial lending institutions
Low documentation loan (LowDoc), a 7(a) loan program The purpose of this program is to reduce the paperwork in loan requests of $150,000 or less. Under LowDoc, the SBA uses a one-page application and relies on the strength of the individual applicant’s character and credit history. The applicant must first satisfy the lender’s requirements. The lender may then request a LowDoc guaranty of 80% on loans up to $100,000 and 75% on loans over $100,000. Small businesses Commercial lending institutions
CAPLines, a 7(a) loan program CAPLines finances small business short-term, cyclical needs for working capital. Under CAPLines, there are five distinct short-term working capital loans: the seasonal, contract, builder’s, standard asset-based and small asset-based lines. For the most part, the SBA regulations governing the 7(a) program also govern this program. Under CAPLines, the SBA generally can guarantee up to $750,000. Small businesses Commercial lending institutions
SBA Express, a 7(a) loan program The SBA Express is a new loan program, which replaces the FA$TRAK pilot program that encourages lenders to make more small loans to the small business community. Participating banks are permitted to use their own documentation and procedures to approve, service and liquidate loans of up to $150,000. In return, the SBA agrees to guarantee up to 50% of each loan. This loan program provides a rapid response from the SBA—within 36 hours. Loan maturities are the same as those for the regular 7(a) loan program. Small businesses Commercial lending institutions
Export working capital program (EWCP), a 7(a) loan program Replaces the export revolving line of credit program. Under the EWCP, the SBA guarantees up to 90% of a secured loan or $750,000, whichever is less. Loan maturities are the same as those for the regular 7(a) loan guaranty program. Loans can be for single or multiple export sales and can be extended for preshipment working capital and postshipment exposure coverage or a combination of the two. Proceeds can be used only to finance export transactions. Export-ready small businesses Commercial lending institutions
International trade loan (ITL), a 7(a) loan program The ITL offers long-term financing to small businesses engaged or preparing to engage in international trade, as well small businesses as those businesses adversely affected by import competition. The SBA can guarantee up to $1.25 million for a combination of fixed-asset and working capital financing. The working capital portion cannot exceed $750,000. Export-ready small businesses Commercial lending institutions
Source: U.S. Small Business Administration, SBA Profile: Who We Are & What We Do, 1996, with updates to May 1999.

Note: Only six of the nine SBA guaranty 7(a) loan programs are described in this table. Other 7(a) programs include minority prequalification loans, women’s prequalification pilot loans and defense loan and technical assistance.


The SBA recently introduced three new loan programs for special situations.

The low documentation loan program. The SBALowDoc loan program, a pilot program lasting until September 30, 2001, makes applying for an SBA loan under $150,000 more user-friendly. Slashing pages off the application package (its application form is only one page front and back) and bureaucracy out of the loan process, LowDoc loans may be electronically filed with a 36-hour turnaround time, leading to a loan in a few days. The program arose in response to complaints about an application process that was too cumbersome and costly for small amounts.

LowDoc streamlines the loan application process for new businesses, business acquisitions and existing businesses. These loans are less formal than the regular 7(a) loan—they require less paperwork than the regular 7(a) loan, for instance—and depend heavily on the lender’s judgment concerning the borrower’s credit history and character. There is no equity test and the amount of collateral is not a determining factor. The application form for loans under $50,000 consists of one page, while those for loans from $50,000 to $150,000 are a single page plus the lender’s internal loan documentation. Any small business is eligible as long as average annual sales for the previous three years were $5 million or less and the business employs 100 or fewer individuals. As with the 7(a) loan, there is an 80% guarantee on loans up to $100,000 and 75% guarantee on loans between $100,000 and $150,000.

The export working capital program. The EWCP can help small businesses obtain working capital loans to finance their export sales and to encourage lenders to “bank” these export transactions by significantly reducing the associated risk through an SBA-guaranteed private-sector loan. The EWCP can support either single or multiple export sales transactions by guaranteeing 90% of a private-sector loan (generally up to a maximum guaranty of $750,000). Loan maturities normally are 12 months, with two options to renew, for a total of 36 months. Loan proceeds may be used for

  • Financing labor and materials for manufacturing goods for export.
  • Purchasing goods or services for export.
  • Financing accounts receivable from export sales.

Businesses may not use the loan proceeds to establish operations overseas, acquire fixed assets or pay existing debt. Interest rates are determined by the lender subject to SBA rate limits. The SBA charges a one-time fee at the same rate as for regular 7(a) loans.

EWCP features also include a simplified application form and a quick turnaround time. Small businesses may apply directly to the SBA for a preliminary guaranty commitment. The preliminary commitment allows the exporter to search for a lender that is willing to extend credit. Lenders contact the SBA for the final commitment.

Y2K action loan program. On April 2, 1999, President Clinton signed into law the Small Business Year 2000 Readiness Act, which requires the SBA to provide for a loan guaranty program to address the year 2000 computer problems of small businesses. The Y2K action loan program uses current 7(a) policies and procedures, except that it provides maximum flexibility in establishing terms and conditions and allows up to a one-year moratorium on principal payments.

The SBA can guarantee 90% on Y2K loans of $100,000 or less and up to 85% on Y2K loans over $100,000, with maximum exposure of no more than $750,000. If a borrower already has an SBA loan, the maximum SBA exposure is $1 million. Loan proceeds may be used only to address the Y2K computer problems, including

  • The repair and acquisition of information technology systems.
  • The purchase and repair of software.
  • The purchase of consulting and other third-party services, and related expenses.
  • Relief from economic injury incurred as a direct result of Y2K problems or as an indirect result of any other entity such as a service provider or supplier.

Y2K loans are made by authorized SBA lenders and guaranteed by the SBA. They are available through December 31, 2000, to help small businesses become Y2K-compliant; after January 1, 2000, the SBA will guarantee loans to small businesses that suffer economic injury as a result of Y2K-related problems.

CPA Firms Are Small Businesses, Too!
Smaller accounting firms often overlook the fact that they, too, may be eligible to qualify for small business loans. Interested CPAs should contact the SBA directly for more details. The SBA has an answer desk for both management and financial assistance—800-827-5722. Operators are available Monday through Friday from 9 a.m. to 5 p.m. eastern time, and you can leave a message any time. The SBA’s Web site ( ) provides detailed information concerning the SBA’s financial, management and procurement assistance programs; descriptions of all loan programs; e-mail access to the SBA; and links to other Internet Web sites of interest to entrepreneurs.


You’ve considered your client’s position and needs and you’re ready to go. But before the business even contacts the SBA, it first must apply to local banks for a conventional bank loan. The borrower is free to shop around for the best terms. If the loan is rejected for risk factors or bank policies, the loan package is eligible for SBA financial assistance programs. If a conventional loan is not available on reasonable terms, then the bank, the client or the CPA can contact the SBA for a guaranteed loan. When the bank contacts the SBA, which is the usual process, the borrower is often not aware of the SBA involvement. The bank will deal directly with the SBA. Only banks having guarantee agreements with the SBA (“qualified banks”) are eligible to participate in the guaranteed loan programs. You and your client will have to sit down together and do some homework before your client requests SBA financing. You’ll need to compile the following information:

For a new business. The client, with the CPA’s help, should prepare, in narrative style, information on the type of business, the legal organization, the location, the customer base, the competition, the availability of suppliers and any other details pertinent to the business being established. Either the client or the CPA should be sure to prepare the following:

  • A profile of management, describing the experience and abilities of the owners and key personnel.
  • An analysis of the capital requirements, including an estimate of how much the client has to invest in the business and how much it will need to borrow from the bank.
  • A personal balance sheet for each loan applicant (all the company’s principal owners) using fair market value for all assets and liabilities.
  • A projected income statement for the new business with month-by-month detailed projections of earnings for the first year of operations.
  • A list of all the collateral to be offered at fair market value as security for the loan.

For an established business. You’ll need to prepare

  • A statement showing how much the business will need and why.
  • A current business balance sheet, not including any personal items.
  • A current business income statement showing the previous year and the current period to the date of the balance sheet. A projection of earnings can help show payment ability.
  • A current personal balance sheet of the owner and each partner or stockholder owning 20% or more of the business.
  • The collateral to be offered at fair market value as security for the loan.

The SBA requires that all available assets be offered as collateral for a loan. However, the SBA usually does not decline a loan solely because the collateral is inadequate. The banker prefers cash liquidity rather than collateral represented by personal and business assets. Loan repayment history and management ability often are more important to the acceptance of either a conventional or an SBA-guaranteed loan application. The small business client must satisfy both feasibility criteria and eligibility criteria for a loan guaranteed by the SBA and made by a participating bank.

Feasibility. The SBA applies the following three tests to assess creditworthiness. As with any test, preparation leads to a better chance of passing.

  • Cash flow. A cash flow projection (forecast) will demonstrate the business’s ability to cover expenses, owner withdrawals, loan payments and all other payments from business earnings. The loan applicant must demonstrate that the loan can be repaid. When a CPA provides assistance by preparing either forecasts or prospective financial statements, the degree of responsibility associated with the financial statements should be clear. For specific guidance, the CPA should review AICPA Professional Standards, “Financial Forecasts and Projections” (AT section 200.01-.68).
  • Management ability. The client must show an ability to run the business. For a start-up, the client should have experience both as a manager and in the business being started.
  • Equity. The client must have his or her own capital at risk in the business. Nonbusiness assets pledged as collateral cannot be part of equity. (The SBA cannot guarantee a loan to a business with a negative net worth.)
    Exhibit 2: Suggested Outline for a Business Plan
    Cover sheet. List the name, address and telephone number of the business and any names of principals involved in the business.

    Statement of purpose. Explain why the business plan has been developed.

    Table of contents

    A. The business

    1. Description of the business.
    2. Marketing.
    3. Competition.
    4. Location of the business.
    5. Management and personnel.
    6. Operating procedures.
    7. Business insurance.
    8. Application and expected effect of the loan.

    B. Financial data

    1. Loan application.
    2. Capital equipment and supplies list.
    3. Current balance sheet for business.
    4. Break-even analysis.
    5. Pro forma income statements (projections of profit and loss).
      Three-year summary.
      Detail by month for first year.
      Detail by quarters and second and third years.
      Notes explaining how projections were made.
    6. Pro forma cash flow statement (also called either a cash forecast or cash budget).
      Follow guidelines for 5 above.
    7. Historical financial data for an existing business, not a new business.
      Balance sheets on business for the past three years.
      Income statements on business for the past three years.
      Tax returns on business for the past three years.

    C. Supporting documents

    1. Personal tax returns of principals for the last three years.
    2. Personal balance sheets (banks may have these forms).
    3. Copy of proposed lease or purchase agreement for building space.
    4. Copy of licenses and other legal documents.
    5. Copy of resumes of all principals.

    Source: U.S. Small Business Administration, SBA Loan Information, an in-house information sheet for the Anchorage, Alaska, SBA field office, 1996.

Equity requirements differ for new and established businesses. Clients starting a new business or purchasing an existing business should have about $1 of cash or business assets for every $2 of loan—a 1:2 ratio. In other words, the client should be at risk for at least 33 13% of the total business investment. For established businesses, the SBA requires the ratio of total net worth to debt after the loan to be about 1:4 or better. In other words, the owner-manager of an up-and-running business should provide 20% or more of the total business investment.

If the loan application meets the three feasibility criteria, the client generally will obtain the necessary funds. Even if one of the feasibility criteria is weak or absent, the loan still may be workable. Management ability and cash flow are the keys; if these two factors are strong, the SBA usually approves the loan. However, if management is weak, earnings usually are weak; if equity is weak, collateral usually is weak.

Extra credit: the business plan. Although not essential to obtaining SBA financing, a formal business plan helps a new or expanding company—one likely to need financing—start off on the right foot. A CPA can be of great help in its preparation.

A business plan should contain the following elements:

  • The principals involved.
  • The business purpose.
  • The details on marketing, competition, location, personnel, operations and insurance.
  • The financial details on the loan application; equipment and supplies lists; current balance sheet; break-even analysis; prospective income statements; prospective cash flow statements; and historical financial data covering balance sheets, income statements and tax returns.
  • The supporting documents, such as tax returns of principals, personal financial statements, copies of legal documents and resumes of principals.

Business plans force entrepreneurs to carefully focus and consider assumptions underlying the business venture; indeed, they help them decide whether to start or continue a business activity. Business plans help both client and CPA figure out how much financing the business will need and the best uses for the loan. See exhibit 2 for a suggested business plan with extensive documentation. The accountant and client should decide together on the extent of documentation necessary in each case.


If you’ve helped your client successfully make it through the SBA loan process, you’ve only started. You now have a new business client—or an existing one that’s planning to grow. You’ll be there for future financing needs and an increasingly wide variety of other consulting services as the company grows. The newspapers are full of accounts of Silicon Valley start-ups, for example, that parlayed a few hundred thousand dollars or less into billion-dollar enterprises run by executives barely old enough to drive. If you can master the financing, you can grow not only your client companies but your own firm as well.


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