Ask HN: Using SBA Line Of Credit For Startup Costs? | Hacker News Reader

Ask HN: Using SBA Line Of Credit For Startup Costs?

9 pointsprofgubler9 comments

I am looking at different options to finance costs such as bandwidth costs, in the beginning stages. Has anyone gotten an SBA line of credit and how did it work for you. Are the rates good, and would you do it again or go another route.

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Everyone thinks that an SBA loan is "easier" to get or that any business can go right out and get one. That is far from the case. The process of getting an SBA loan is the same with a standard bank loan, except you now have an added layer with the SBA application. You first must find a bank that is an authorized SBA lender (not every bank is, but all big banks are). You will then go through the bank's standard screening process (i.e. credit check, biz plan review, collateral) and simulataneously have your application submitted to the SBA for approval. If both the bank and the SBA approve your loan you get your money from the bank. Also, the bank may approve your loan contingent on the SBA approval.

SBA loans do require collateral (i.e. home, equipment, etc...). That is why typically businesses use them to finance equipment or buildings. The SBA loans, and bank loans for that matter, are not geared towards "web startups". You will have a much easier time convincing your friends and family to lend you a few thousand for the next great internet company then you will have convincing a bank manager.

The above is just my two cents, I have never applied for or received a SBA loan. I have, however, considered getting one a few years back. I had a lengthy discussion with my bank manager and decided after it was not worth the hassle. I just begged friends and family instead and the turnaround time was much quicker.

Bandwidth charges are so small relative to the value of data that unless your business plan is "host pirated content for poor college students" (hello, Youtube) you should be able to absorb them easily without needing a loan to do so.

Hosting/bandwidth expenses next to a business which is actually designed to charge money for value are chump change. I could quite literally pay mine for the year with loose change I found around my apartment (I found $250 on Sunday in my annual cleanup but I'll confess I'm just a wee bit pathological about it, and helped by the fact that Japan has very common 100 yen coins).

I will post my experiences dealing with the SBA. For the record I have NOT secured an SBA loan in the past.

For starters, you're going to need a very refined and up-to-date business plan. This is a no-brainer to most, especially HN readers but my banker told me I would be surprised about how many people shuffle in for an SBA loan with no biz plan.

The way the SBA loan works is that you have to find a lender in your area that will agree to lend you the money after they do a financial screening and feel you are worth the risk of the loan.

After that, the only involvement the SBA has in the process is they guarantee the loan that you receive from the bank. They do not disperse any of the money.

After the bank approves you, and the SBA agrees to back your loan (which can take several months), then the money is released to you via the bank.

Sadly this process was too lengthly to me so I just resorted to using an Amex Business card to get me running in the time-frame I needed. :)

That's all I know from the process. I hope this might help some folks in the future

The question you have to ask yourself is: what makes the bank think my company is good for the loan?

Banks like lending if they get collateral. For example, buy a house and the bank gets that house if you don't pay. Buy a dump truck and you don't pay, they get the dump truck. They can't really take bandwidth.

Part of the problem is that a start-up might try something for 6 months, fail, and then just declare bankruptcy. Since the shareholders/members of corporations and LLCs aren't liable for debts, the bank just looses the money. Would you be willing to be personally liable for the debts by co-signing?

It should also be recognized that banks are wary right now. They've been burned and are strapped for cash. Unless you can prove that you're safe to lend to, you won't get it.

In terms of rates, prime + 2.5-6.5% would be normal depending on the risk and size and such.

Do you really need it? Bandwidth and servers are cheap today unless you're doing a lot of video serving. Heck, you can even find Content Delivery Networks that will serve for less than $0.20/GB. If your site really takes off with traffic, don't worry because you'll have VC banging on your door. If it doesn't take off, you don't have to worry about bandwidth too much.

When I researched SBA loans I found they are more willing to give you a loan for property or equipment than things like marketing costs.

Also, in the environment its much harder to get a loan. Instead I ended up getting an American Express plum card to help give me some extra time to pay for expenses. This really helps with cash flow.

I know nothing about you, but it's really hard to get an SBA line of credit at a young age even if you can show _revenue_.

Unless you have an established income history, or a profitable business or two under your belt, I'm not sure if it's worth your time.

For me the real question is, if this is even a reality if you are trying to run your web based startup. All you hear about is VC, angel funding or complete bootstraping. But, what if you only a smaller sum of money in regular intervals, let's say $3 to 5K, because you feel you can repay this easily due to your business model. I know it would help free up other capital and let you run your business and not give up ownership to VC.

I'm also interested in any information about this. I've looked around a little but all of the sites I've found are way unorganized and hard to read.

the problem is that its next to impossible to get a loan for a web based startup

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