During a town hall meeting in Tampa in recent months, Tampa, Fla. entrepreneur Steven Gordon had the opportunity every small business owner would kill kittens for – the chance to ask President Barack Obama why the Small Business Administration won't make loans directly to small businesses.

The president told Gordon that the process, which would mean the government would have to "stand up a massive bureaucracy," would take too long, Obama said, and would only serve to frustrate small business owners.

Gordon wasn't satisfied with the answer he received, and he recently attended a joint hearing of the House Financial Services and Small Business committees in Washington.

Karen Mills, SBA administrator, echoed Gordon's concerns, saying business owners need access to loans and counselors who can help them become creditworthy.

The SBA has a long and storied history of lending. The Small Business Act created the SBA in 1953, and allowed the agency to finance businesses directly or in cooperation with banks or other financial institutions. Direct loans are limited up to $350,000, and the SBA lent money to businesses that banks rejected through the late 1980s, and through the late 1990s to disadvantaged borrowers. Since that time, the agency has undergone restructuring and downsizing, but is still making loans to homeowners and businesses following a disaster.

The House has twice passed legislation calling for direct SBA loans.  Its SBA reauthorization bill creates a new capital backstop program tailored to recessions, which would allow the SBA would help borrowers prepare a business loan application and then shop it to banks. If no bank is willing to make the loan, the SBA would make the loan. This program will end in September 2011.

In the Senate, no one is particularly enthused about the bill, including Ben Cardin of Maryland, who is on the Small Business Committee. And so the debate continues.

In the meantime, what’s a small business owner to do in order to obtain need funds for the cost of operation, expansion or new hire-related costs?

An unsecured loan or line of credit could be the answer, and will help a small business owner establish credit.

There’s a lot of work to do before you go to the bank asking for a startup business loan, and whether or not you get your loan will depend on your expectations and preparations.

What to expect
• Nearly all businesses begin with personal saving and money from friends or family. In fact, unless you’ve already raised 25% of the startup costs from these sources, no bank will give you a startup business loan. If you’re not willing to put your money on the line, why would a banker?

• You’re almost certainly going to need collateral. It might be your house, your car or your inventory. If it’s any of these, don’t expect the value to match that of your cost or appraisal; if you’re unable to pay back the startup business loan, it’s going to cost the bank a lot of money to liquidate your assets. Accordingly, the bank will most likely ask for collateral equal to 150% of the startup loan.

• Showing the bank the money and collateral you’re bringing to the table is only the beginning. You have to convince the lender that your new venture is going to generate enough money in the first year to pay back the startup business loan with interest. Your business plan better be very well researched.

• Your personal credit will be an important factor in acquiring a startup business loan because a new business has no real credit history of its own. If your credit record has errors, correct them; if it has negatives, consider delaying your loan request until you’ve added positive entries and raised your credit score.

• The importance of loan officer’s impression of your character and personal attributes shouldn’t be underestimated. Part of that assessment will be based on your education, professional background and reference letter, but the rest is subjective. Even if your proposed business will allow you to work from home in your bathrobe, dress like a banker for all face-to-face meeting.

• Getting a startup business loan typically takes 60 to 90 days. If you fail to provide required information early on, expect it to take longer. The best idea is to meet with the bank in advance to get a checklist.