Busting the 'Free Money' Myth

(page 2 of 2)

Related Items

• Tapped Out?
• Hungry for Cash
• Securing a Loan After Bankruptcy
• A Short Guide to SBA Loans
• You're on Equal Footing at the SBA
• A Helping Hand Withheld?
• Small Business, Big Disaster

Since the 1980s Matthew Lesko has sold millions of copies of phonebook-sized books with titles like Free Money for Entrepreneurs. Credit: Matthew Lesko

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• digg this
• save to del.icio.us

SBA Loans Cost More

Entrepreneurs who aren't sidetracked searching for grants are often similarly disappointed to discover that, while the SBA does lend money, it doesn't hand out interest-free or low-interest loans to start new businesses. It's true that the disaster-recovery arm of the SBA makes federally subsidized loans to individuals and businesses affected by disasters, but the SBA's authority over this program is essentially a bureaucratic quirk. (Adding to the confusion: When interest rates were skyrocketing in the mid-1980s, a short-lived SBA direct-loan program did offer small-business loans at a fixed rate of 8%, "but we haven't had money for that for years," Hammersley says.)

In fact, because SBA loans are considered riskier, borrowers pay a slight premium for the small "credit enhancement" an SBA guarantee provides. Hammersley says the SBA avoids using the term "low interest" to describe its programs because, with the exception of disaster loans, SBA loans aren't intended to be below market rate. In most cases, borrowers with good enough credit to qualify for an SBA 7(a) loan could get a lower interest rate on a conventional bank loan, Adams says. "And if you've got bad credit and no collateral, chances are no one's going to lend you money."

Good Places to Start

Of course—as Lesko is quick to point out—there are exceptions. Some state and local economic development offices sponsor low-interest, revolving loan funds or microloan programs. The amounts disbursed are typically very small—$5,000 or less—though a handful offer more. (In Minnesota, for example, entrepreneurs can qualify for state-subsidized loans up to $300,000 to fund a business that will create jobs in low-income areas of the state.)

But entrepreneurs would be wise to think twice before forking over cash for books or workshops that promise to divulge the "secrets" of getting a grant or a loan. Adams says entrepreneurs would be a lot better off starting their funding search at a local SBDC office, or that of another SBA-funded program, such as SCORE. The answers won't be any different, he says. "If you'd have come to the SBDC we'd have told you for nothin'."

Miller is a New York-based staff writer covering startups and small business. Miller is a graduate of Brown University.