As an angel investor or venture capitalist, you’re constantly seeking the next big idea, the disruptive technology, and the visionary entrepreneur. Your capital is often the crucial spark that ignites a startup’s journey. But what happens when that initial equity injection needs to be supplemented, perhaps for scaling operations, purchasing equipment, or managing working capital during growth? This is where an often-overlooked, yet powerful, tool comes into play: the Small Business Administration (SBA) loan.

While SBA loans are traditionally associated with bootstrapped small businesses, they can be an invaluable asset for startups, even those with institutional investors. And surprisingly, angels and VCs can play a significant role in helping their portfolio companies successfully navigate the SBA loan application process.

 

Why Consider an SBA Loan for a VC-Backed Startup?

Even with access to equity funding, SBA loans can play a smart, complementary role:

• Non-Dilutive Capital: Unlike another round of equity, an SBA loan doesn’t dilute the founders’ or existing investors’ ownership. This is a huge win for everyone involved.

• Lower Cost of Capital: SBA loan interest rates are often better than other early-stage debt options that a new business may qualify for.

• Extended Runway: An SBA loan can extend a startup’s cash runway, allowing them to hit critical milestones before needing to raise another equity round, potentially at a higher valuation.

• Strategic Growth: It can provide the necessary capital for specific growth initiatives that might not fit neatly into an equity funding round’s use of proceeds.

• Diversification of Funding Sources: Relying solely on equity can be a risky strategy. Adding a debt component diversifies the company’s funding structure, providing a more balanced approach.

 

How Angels and VCs Can Be Catalysts for SBA Loan Success?

So, how can you, as an investor, actively assist your portfolio companies in securing an SBA loan?

 

1. Introduce Them to Lender Networks

• Your Rolodex is Gold: You likely have relationships with bankers and lenders who specialize in SBA loans or are generally “startup-friendly.” Make introductions! A warm referral from a respected investor can significantly open doors for an entrepreneur.

• Understand Lender Criteria: Different banks have different appetites for risk and specific industries. Your knowledge of the lending landscape can help steer your entrepreneurs toward the right institutions.

 

2. Bolster the Business Plan and Financial Projections

• Investor Due Diligence is a Head Start: The rigorous due diligence you conducted before investing is precisely what an SBA lender will want to see. Help the entrepreneur package this information effectively.

• Refine Financial Models: Lenders scrutinize financial projections heavily. Leverage your financial expertise to help your portfolio company develop robust, realistic, and well-supported financial forecasts that demonstrate repayment ability.

• Highlight Use of Funds: Ensure the business plan clearly articulates how the SBA loan funds will be used and how that use directly contributes to revenue generation or cost savings, thereby strengthening the company’s ability to repay.

 

3. Provide Strategic Guidance on Loan Structure and Terms

• Understand Collateral and Guarantees: While SBA loans offer government guarantees, lenders still require some collateral and often personal guarantees from founders. Your guidance can help founders understand these requirements and structure their approach more clearly.

• Advise on Loan Type: There are various SBA loan programs (7(a), 504, microloans). Your strategic insight can help determine the best fit for the company’s specific needs and the optimal use of its funds.

 

4. Lend Credibility and Confidence

• Your Investment is a Vote of Confidence: The fact that reputable angel investors or VCs have already invested sends a strong signal to lenders. It demonstrates that experienced investors believe in the business’s potential and have validated its model.

• Offer to Speak with Lenders (Carefully): While you shouldn’t guarantee repayment, offering to speak with a prospective lender about your belief in the company and its team, and your ongoing support, can be incredibly influential.

 

5. Help Address Lender Concerns Proactively:

• Identify Weaknesses: Based on your experience, you can often anticipate areas where a lender might have concerns (e.g., limited operating history, fluctuating cash flow). Help the entrepreneur prepare responses and mitigating strategies.

• Focus on Risk Mitigation: Highlight the company’s strengths and how your ongoing support and capital mitigate risks for the lender.

 

A Win-Win-Win Scenario

By actively assisting your portfolio companies in obtaining SBA loans, you create a win-win-win scenario:

• For the Entrepreneur: Access to crucial, non-dilutive capital for growth.

• For Your Fund/Angel Group: Increased runway for your portfolio company, potentially leading to a stronger next funding round and a higher return on your initial investment.

• For the Lender: A more confident investment in a growing business, backed by the validation of experienced investors.

 

In today’s dynamic startup landscape, smart capital means more than just equity. It means providing strategic support, leveraging your networks, and helping entrepreneurs access all available resources for sustainable growth. Don’t underestimate the power of an SBA loan or your role in unlocking it for your portfolio companies.

 

 

About the Author

Catlin Bulger is Senior Associate, Investor Networks at FINSYNC. She helps investors support startups with smart, non-dilutive funding strategies.