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Navigating Small Business Loans

by Collette McKenna Parker

June 25, 2008

W hen Andy Levine wanted to start his business, like all entrepreneurs he needed start-up capital – around $750,000. He borrowed a large chunk from local entrepreneurs, Larry and Scott Dorfman, in exchange for 50 percent of the profits, but he still needed an additional $100,000.

So he asked other people – a lot of other people. He found 99 friends willing to give him $1,000 each, and he launched Sixthman, an Atlanta-based company that uses technology to create products and services for athletes and entertainers.

Small business loans are a way of life for an entrepreneur, but 99 friends is a lot of asking.

Actually, there is an easier way. The federal government structures several loans to benefit small businesses. If your idea is right and your credit is okay, there might be a loan for you. The Small Business Investment Companies (SBIC) program is an option for almost any industry and any stage of development, while the Small Business Innovative Research (SBIR) program and the Small Business Technology Transfer (SBTT) program were both designed for companies working on technology that might help federal agencies or non-profits.

1. Small Business Investment Companies (SBIC): The Small Business Investment Companies (SBIC) program was created to provide loans to small businesses. While the SBA doesn’t actually give money to start-ups, it has collected a cache of investment companies that are privately funded and managed, but licensed and regulated by the SBA. In fact, there are over 400 SBICs across the country today, three of which are in Georgia: EGL/NatWest Equity Partners USA, Global Capital Funding Group, and Salem Capital Partners II. Find their contact information here.

SBICs make equity and/or debt investments. Here are a few considerations:
Some SBICs pursue specific businesses that specialize in areas in which their management has expertise, while others make general investments.
•    Most SBICs prefer to invest in a certain stage of investment (start-up, expansion or turn-around).

•    Debenture SBICs focus primarily on providing debt or debt with equity features and usually grant loans to mature companies with some profit.

•    Participating Securities SBICs typically focus on making pure equity investments on early stage companies.

•    To qualify for an SBIC loan, you must be a small company as defined by the SBA: basically, you must have a net worth of $180 million or less. All of a company’s subsidiaries and parent companies are considered when determining the size. (You can learn more details about size limitations here.)

2. Small Business Innovation Research (SBIR): Another federal program, SBIR, was created to help technology companies working on research that may benefit one of 11 federal agencies, including the Department of Defense, NASA, the Department of Commerce and the EPA. Capital up to $850,000 is available, and, according to SBIR, the small business incurs no debt, gives up no equity and retains intellectual property rights. The company may then commercialize the technology and even sell the resulting product to the federal government.

There is a three-phase process for SBIR capital:
•    Phase I: The first step is to respond to RFPs from the various agencies looking for new technology. Up to $100,000 is available for a six-month feasibility study for the new technology.
•    Phase II: Up to $750,000 is available for a two-year period for a prototype to be developed and ensure it meets the needs of the federal agency that originally made the request.
•    Phase III: The final phase is for the commercial development of the new product. Typically, there is not any federal funding for this phase, but if the product proves marketable often other capital financing can be obtained.

3. The Small Business Technology Transfer (STTR): This program is a sister program to SBIR and is parallel in structure, however it is designed to benefit non-profit research institutions (such as a university), rather than government agencies. This program requires the company to work with a non-profit on the new technology.

In Georgia, there is an SBIR Assistance Program to help businesses determine if either the SBIR or STTR program is right for them and to guide them through the research and RFPs needed to participate. The SBIR Assistance Program for the State of Georgia, a unit of the Georgia Tech Enterprise Innovation Institute, and is available at no cost to Georgia companies. Find out more about these programs here.

The design of all three of these programs is to offer additional resources and maximize the potential of small businesses.

And, hopefully, it’s a little easier than asking 99 of your friends.

Collette McKenna Parker has been an Atlanta business writer for more than 10 years, and started her career as associate editor of Business to Business magazine. She was managing editor of Catalyst before becoming a full-time freelance writer and has written for dozens of local and national publications, including several years as a Time magazine southeast business stringer.

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