The Truth About SBA Loans

September 2016

By Gabe Makhlouf

At some point, nearly all-small business owners will need to borrow money, whether it’s to purchase, expand or renovate commercial real estate, finance the purchase of an existing business or grow organically.

One viable option for small businesses in need of financing is to apply for a loan backed by the Small Business Administration. While the SBA doesn’t provide direct loans, it does provide guarantees on loans that originate from the agency’s partnering lending institutions.

If you partner with the right bank, preferably an SBA Preferred Lender, the bank will complete the application for you and make the process as painless as possible.

There are several common misconceptions about SBA loans. The first is the belief that they require a lengthy application process and that it takes too long for funding to be secured. In reality, because loans are handled through lending institutions, the process isn’t much different than applying for a conventional loan and, in some cases, can be even easier.

Below are some common misperceptions associated with the SBA program and the benefits of working with a preferred partner.

What are some of the most common myths associated with SBA loans?

There are many misconceptions about SBA loans that might prevent business owners from inquiring or applying. Some mistakenly believe that SBA loans are only for the smallest of small businesses. However, the maximum amount of a loan has increased from $2 million to $5 million. While it is true that the SBA used to have a very structured definition of what a small business is, it has now expanded the definition and opened the parameters so that more businesses can apply. Government data show that 98 percent of all businesses in America would qualify for an SBA loan under the current definition.

Another common misconception is that because the SBA is a government program, all SBA lenders are the same. In reality, each lender has its own credit philosophy. For example, credit criteria such as historic cash flow, collateral loan-to-value percentages and management experience vary from lender to lender. As a result, it is important to build a strong relationship with a top SBA lender, again preferably an SBA Preferred Lender, in your market to learn about its credit parameters.

Another myth is that SBA loans take forever to be credit approved and funded. Over the last several years, the SBA has worked hard to speed up processing times, reduce paperwork requirements and, in general, make it easier for banks to provide small business customers the capital they need. Many of the myths and rumors about the SBA are rooted in previous bad experiences that simply don’t hold true today.

While in the past, the agency has struggled with slow processes and arduous requirements, a great deal has changed. The SBA is now investing in people and technology to create an agency that is more efficient and responsive.

How can working with a preferred SBA lender help expedite the loan process?

A preferred lender is an institution that the SBA has designated as its agent. Most of these lenders have dedicated staff that specialize in SBA loans and can process these loans as efficiently as conventional loans.

There are a number of rules involved with SBA loans, which cover who is eligible for financing, what can be financed and what interest rate can be charged. A lender who is not intimately familiar with SBA loans might not know all of the stipulations, or not have necessary processes and procedures in place to comply.

You can go to www.sba.gov to find information on your local SBA district office and the top lenders in your market.

How would you address the myth that an SBA loan is a last resort for financing?

The SBA program is designed for credit-worthy borrowers who have difficulty getting access to financing at reasonable terms. It is true that there is a requirement that stipulates you are unable to get a conventional loan. However, it is also true that many times a bank can’t consider a request for a conventional loan but may be able to look at an SBA loan differently.

Take, for example, a company that needs a $200,000 loan, but the equipment is only valued at $150,000. In this instance of a collateral shortfall, a business won’t be eligible for a conventional loan, but through the SBA 7(a) program, 75 percent of the loan is guaranteed by the government, and the bank only has to rely on the 25 percent on the collateral remaining.

What are the fees and up-front costs associated with SBA loans?                

The SBA program is resolute in the fact that small businesses are not to be charged an application fee, or a bank management fee. Guarantee fees — typically 2 to 3.5 per- cent of the guaranteed portion of an SBA loan — allow the program to operate at an efficient cost for taxpayers.

Fees are not usually a barrier to borrowers because they can be financed over the term of the loan, which may be longer than a conventional loan. In addition, SBA loans have flexible interest rate policies and can be made at fixed or floating rates, and pegged to a prime, LIBOR or SBA peg rate.

SBA rates are competitive with other forms of financing and are a much better value than credit cards and other alterative financing mechanisms that many small businesses use when they are unable to access conventional credit.

Gabe Makhlouf is a First Vice President and Commercial Loan Sales Manager at First State Bank.  Reach Gabe at 586-445-4856 or gmakhlouf@fsb.bank.