I’VE BEEN IN BANKING for over 30 years and, in my time, I’ve seen it all.
My niche, though, is working with the U.S. Small Business Administration (SBA) loan programs, helping business owners realize their dreams.
The ability to dream big within the limitations of a small business structure is what makes an SBA loan special. But, the name can be deceiving — did you know there is really no such thing as an SBA loan?
I’ll explain this and other common SBA myths below
What’s in a name?
Though facilitating lending is a core function of the SBA, it does not directly provide loans. Private lenders, including banks, alternative lenders and certified development companies, provide loans that are guaranteed by the federal government, which makes this investment because it recognizes the importance small businesses play in the economy.
SBA loans have to be difficult…
The relative pain or ease of an SBA loan process is more a reflection of the practitioner than the product. Getting a business loan from a lender always includes sharing financing information, filling out forms and going through a credit approval process. If a lender’s SBA process is significantly more difficult than their other loan products, it may be a reflection of their experience and expertise in SBA lending.
…and slow
Depending on what is being financed, SBA loans might turn in as fast as a couple of weeks for a simple equipment loan, to 60 days or more for construction financing. The loan timing typically reflects the process timing (construction can take longer due to processes like architecture, bidding, permitting, etc.).
It’s only for start-ups
While the SBA 7(a) program can be a good funding tool for start-ups, most of my clients are actually established businesses with a financial track record. We are often helping a current business expand, buy and occupy commercial real estate, or helping someone buy an existing business.
SBA loans are for itty-bitty businesses
Most people would be surprised at how many businesses can be considered a small business concern. Depending on industry, businesses earning tens of millions of dollars in annual revenue or having hundreds of employees can be eligible for SBA financing.
I don’t need funds of my own
Like most lenders, the SBA will typically require business owners to contribute cash equity into the transaction being financed. Equity requirements might range from as little as 10 percent for commercial real estate financing, to as much as 20 percent or more for start-ups. The SBA provides very specific guidance and definitions around equity, so talk with your favorite SBA expert to understand the requirements for your situation.
You can’t finance goodwill
Experienced SBA lenders understand that goodwill, such as brand equity or a portfolio of clients (also referred to as blue sky or intangible value) is often a legitimate part of a business purchase. For service and e-commerce businesses, the entire price of a business may be goodwill. The SBA 7(a) program is designed to help lenders appropriately finance intangible assets.
Commercial real estate = 504 program
The SBA 504 program is an excellent tool for financing commercial real estate and long-term equipment, but it is not the only SBA program for real estate. The SBA 7(a) program can also finance commercial real estate — often on a longer term and with a shorter pre-payment penalty period. A good SBA lender should help you understand all available financing options, including SBA 504, SBA 7(a), and conventional bank financing.
I can finance a “turn-around”
Most SBA lenders avoid funding businesses that are not currently financially stable. Both the SBA and the lender would typically want to see historic debt service coverage of at least 115 percent (i.e. the business needs to show it can make the payments and have some wiggle room).
I can refinance an SBA loan at one bank with an SBA loan from another bank
SBA policy typically prevents SBA loans from being refinanced with new SBA loans. One possible exception would be if the current lender has denied a new loan request. In that case, another lender may be able to either refinance an existing loan or have it transferred to them with SBA approval.
I don’t need to give a personal guarantee or pledge available personal assets
An SBA lender’s job is to help you take advantage of a business opportunity by providing funding. Another important part is to make sure you understand the obligations that come with the opportunity. A personal guarantee is almost always an SBA policy requirement for any owners of 20 percent or more of the business entity. Depending on what the loan is for and the amount of collateral in the business, the lender may also be required to take a lien position on personal assets, such as your home and/or vacation and investment property. A good SBA lender should quickly help you understand the business and personal obligations required to move forward.
The SBA loan rate is set by the government
While the U.S. SBA does set rules around the rates lenders can charge, the SBA loan market is a competitive marketplace. Lenders compete for SBA loans just like other types of loans, and the rate or rates options offered may vary from bank-to-bank. The relative financial strength of the business and owner might also influence the rate offered by the lender.
My business can only have one SBA loan
Most owners and their business(es) are eligible for up to $5 million in total SBA funding. That $5 million can represent multiple loans in various SBA programs – 504, 7(a), Express Revolving Line of Credit, etc. But remember, eligible does not equal qualified or approved. The request still has to make financing sense to the lender.
My personal credit and legal history don’t matter for an SBA loan
Lenders typically have similar personal criteria for SBA and conventional bank loans. They like to see a good personal credit report/score (varies by lender), and hopefully no significant past legal or financial problems such as bankruptcies, foreclosures, short-sales or felonies. If you have any of these in your past, it is best to disclose them as early as possible in the loan process.
Bottom line — work with a proven SBA expert when you need business capital. Experience, expertise and responsiveness are key criteria for a good lender, no matter the size or name of the bank.
