The loan programs provided by the Small Business Administration (SBA) have been the victim of a number of misconceptions that make them appear cumbersome and unattractive to all but the weakest business borrowers. This article will attempt to correct these misconceptions and portray the program as one that every business buyer or seller should be familiar with.
SBA Financing is a “loan of last resort”
The program is intended for credit-worthy borrowers who have difficulty getting access to financing at reasonable terms and advance rates. The SBA offers loan terms up to 25 years for an owner-user commercial real estate purchase or refinance with financing available up to 100% of the project cost. Furthermore, the SBA offers loan terms of up to 10 years for business acquisition with financing available for up to 90% of the project cost. For a small business with tight cash flow, longer terms can mean the difference between a monthly payment that will stretch their budget to the breaking point and one that can be easily managed.
SBA Loans are only for the smallest of small businesses
Government data reveals that 98% of all businesses in America would qualify for an SBA loan! That covers a lot of businesses. Loans for business acquisition can be as high as $5,000,000. A business with 500 employees buying another business for $5,000,000 might not sound like a candidate for an SBA loan, but it could be!
SBA Loans “take forever” to be credit approved and funded
I may have a hard time dispelling this myth for those who have experienced an SBA loan with a lender who doesn’t specialize in these transactions. By working with the “right” lender, an SBA loan takes no longer to process than a conventional loan. As one might imagine, a government program like the SBA has lots of rules. There are rules about who is eligible for financing; rules about what can be financed; rules about what interest rate can be charged, etc. A lender who “dabbles” in SBA has a greater chance of not knowing all the rules, or not having the processes and procedures in place to deal with the rules. Most banks and credit unions can make an SBA loan, but a lender who processes only a few each year will not have the infrastructure to make loans efficiently. Look for a “Preferred Lender” also known as a “PLP” lender, which is a designation awarded by the SBA to the institutional lender. As a “PLP” lender, the institution has sole authority to make credit decisions on behalf of the government. Most of these lenders also have dedicated staff who process only SBA loans and therefore have the expertise to handle loans as efficiently as a conventional loan.
SBA Lenders don’t care about loans being repaid since the government guarantees the loan
Under the SBA 7(a) program, the government generally guarantees up to 75% of the loan amount. On a defaulted loan, the lender takes a loss on the balance over the amount of the loan guaranty. In addition, the SBA holds lenders to strict delinquency and write-off standards to protect taxpayer money and will remove a lender from the “Preferred Lender Program” if write-offs are too high.
Since the SBA is a government program, all SBA Lenders are the same
In addition to the benefits of working with a Preferred Lender mentioned above, each lender has its own credit philosophy. While their credit guidelines must comply with SBA rules, lenders can impose stricter guidelines than the SBA and some do. Most credit criteria vary from lender to lender, including advance rates, historic cash flow coverage, types of properties financed, management experience required, etc. For this reason, it is important to build a relationship with a top SBA lender in your market and learn about their particular credit parameters, as they will be different from other lenders in your market.
About the Author:
Brian McClendon is a Vice President, SBA Lending Officer for Credit Bench, a division of Bay First National Bank, a top-ranked nationwide SBA lender. You can call Brian @ 760-801-3637.