Many businesses will need financing at some point to raise the necessary capital to start or expand. Not all borrowers are going to have a project that a bank can fund in-house due to a perceived risk that they don’t want to take on their own. There is a lot of confusion and SBA loan myths I hope to clear some of them up to help you make a decision whether this type of financing is good for your business.
There are many SBA loan myths surrounding SBA financing. Some of these myths are substantial and strong enough to discourage a small business owner from expanding, getting out from under onerous debt, or even staying in business. Understanding how an SBA loan works and how to successfully get one for your business is a matter of separating the facts from the myths.
The U.S. Small Business Administration (SBA) was created in 1953 as an agency of the federal government to assist businesses in starting and growing for the purpose of maintaining and strengthening the overall economy. The SBA recognizes that small business is critical to America’s economic recovery and strength, to building America’s future, and to helping the United States compete in today’s global marketplace. Although SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same. The SBA helps Americans start, build and grow businesses.
Here are some of the SBA loan myths
Myth #1- The SBA lends money
Fact – The actual funds for SBA loan come from commercial lenders. The SBA provides a government guarantee and as such it loans no money (with the rare exception for disaster loans), but issues guarantees to lessen the risk for the lenders who actually make the loans. Depending on the program, the SBA guarantees loans between 50%-80% of the borrowed amount.
Myth #2 – SBA loans are low interest
Fact – The interest on SBA loans is largely negotiated by the lender. The SBA will pass a small percentage to the lender on their 7(a) and 7(a) affiliated products plus an upfront fee that will make the loan more expensive. The 504 loans are an exception and in several instances can be lower than what the bank can offer.
Myth #3 – Since the loan is guaranteed, the lender doesn’t care how good or bad the business is.
Fact – Lenders making SBA loans are responsible for making good loans. The purpose of the SBA guaranty is to enhance the loan and not to make bad loans. There are several steps the lender has to document to show they did their due diligence and in fact made a reasonable loan.
Myth #4 – The SBA helps people with bad credit get a loan.
Fact – Credit is a very important component in getting any business funded and SBA loans are no exception. An SBA guaranty helps overcome some financing challenges (such as low collateral) but not bad credit history.
Myth #5 – All banks offer the exact same types of financing for SBA loans.
Fact- Loan pricing and structure can vary substantially at different banks and some banks are more competitive in price to be leaders in SBA lending. Some banks will also require additional collateral guarantees, such as a lien on your house. Evaluating the adequacy of such additional collateral guarantees is also subject to interpretation.
Also not all lenders analyze the risk the same, so if you get denied for a loan at one bank another may be interested. Some banks will take a more optimistic evaluation of the facts and your business’ future success. Therefore, choosing the best bank for your SBA loan needs can make the difference between loan approval and denial.
Myth #6 – SBA loans are only for start-ups or small companies, and not for “big” companies.
Fact- The SBA defines a qualifying small business as “one that is independently owned and operated and which is not dominant in its’ field of operation.” The SBA does not discriminate between start-ups or established businesses, and company size requirements are not the same across the board. The actual standard used in determining qualification is calculated by number of employees or average annual receipts and varies by industry.
Myth #7 – SBA loans require a lot of collateral
Fact- SBA lenders do consider collateral when reviewing a loan application, but they also look at several other factors. Your character, creditworthiness and your equity contribution are just as important as having collateral. SBA lenders look at your business as a whole, and although they will not deny you loan solely due to lack of collateral, it can be a contributing factor if there are other weak spots in your application. Ultimately, your ability to repay the loan from your business’s cash flow is the most important consideration.
Lenders are required to take all available collateral and take a blanket lien on all company assets when making a 7(a) loan. The government is guaranteeing a large percentage of the loan, but it will honor that commitment only if the borrower has some skin in the game. Figure at least 10% of the total project though.
While SBA loans are great, don’t assume that you will need one because you are a small business. While SBA loans fill a purpose, there are other options available so don’t go to the bank asking for an SBA loan. Give them time to analyze your project and see if you need it. Also each bank has latitude in making loans so don’t be discouraged if one turns you down. We recommend going to three banks initially to get feedback on your project and to see what the best terms are being offered.
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