Exposing the Myths: SBA vs. Conventional Lending

The Small Business Administration (SBA) offers lending programs that are often misunderstood as a cumbersome, last resort loan funding option. Much of this misperception is centered on borrower experiences with banks who do not specialize in SBA lending, are not a preferred SBA lender, or do not have specific lending expertise or knowledge of the Hotel industry.

As a lender at Live Oak Bank I frequently get questions from customers to this regard. I’ll attempt to debunk the common myths heard about SBA lending.

  1. Myth: SBA loan products are not borrower friendly.

Actually, SBA loans tend to be borrower friendly, flexible to equity and collateral requirements, have longer terms and do not have loan covenants or balloons. For example, a conventional loan may have a 10 year amortization with a balloon in 3-5 years, while an SBA loan will have an amortization and term of 25 years for most hotel loans.

  1. Myth: The lending process is slow and inefficient.

SBA lending requires numerous documents and can be tedious for borrowers when the lender is not a specialist. When considering an SBA loan, it is helpful to seek out a lender who is part of the SBA’s Preferred Lender Program (PLP). A PLP lender will know how to determine eligibility and properly structure the loan. PLP status allows the bank to approve the loan without waiting for the SBA’s approval; the bank acts on behalf of the SBA.

  1. Myth: The SBA lends money directly to small business owners.

False! In an SBA loan, the bank makes the loan, but the debt is partially guaranteed by the SBA. This allows the bank to provide credit for a borrower who may otherwise have difficulty obtaining a loan with favorable terms. The SBA acts like an insurance company, allowing the bank to extend its conventional credit reach.

  1. Myth: Any small business can receive a small business loan.

There are certain eligibility requirements within the SBA program. A lender will explore the “5 C’s” of the customer which are credit, character, capacity (cash flow), collateral and condition of the business. A lender who knows the hotel industry has the specific knowledge to understand these components as they relate to hotel ownership and evaluate your entire financial picture to structure a loan that meets your needs.

The reality is an SBA loan can be a viable option to many small business owners. Do your research, find a bank that knows your industry and is a designated preferred lender, and you will be on your way to securing your dream.