The Small Business Administration (SBA) offers lending programs that are often misunderstood as cumbersome, last resort loan funding options. Much of this misperception is centered around borrower experiences with banks who do not specialize in SBA lending, who are not preferred SBA lenders or who do not have specific lending expertise or knowledge of the complexities of your small business.
At Live Oak Bank, we frequently get questions of this nature from our customers. In this article, we’ll attempt to debunk the common myths of SBA lending.
Myth: SBA loan products are not borrower friendly.
This is not true. Actually, SBA loans were created to be borrower friendly. When compared to conventional loans, they are generally more flexible with equity and collateral requirements, have longer repayment terms and do not have financial covenants or balloon payments associated with them. For example, a conventional loan may have a 10-year amortization with a balloon in three to five years, while an SBA loan offers a seven- to 10-year amortization and term, no balloon payment and can even provide up to a 25-year amortization and term if there is a real estate component to the acquisition. In most cases, the industry standard interest rates charged under the SBA are more favorable than a conventional, non-SBA bank loan.
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. For the most part, the amount and type of financial information required under the SBA is the same information required by conventional, non-SBA banking options. 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, properly structure the loan and collect appropriate documents to keep things moving smoothly. PLP status allows the bank to approve the loan without waiting for the SBA’s approval; the bank acts on behalf of the SBA.
Myth: The SBA lends money directly to small business owners.
False! With 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 such favorable terms. The SBA acts like an insurance company, allowing the bank to extend beyond its conventional credit reach.
Myth: Any small business can receive a small business loan.
The old school perception that the SBA is only for underperforming businesses and/or borrowers with bad credit is a myth. In fact, the SBA program can be used to finance quite sophisticated businesses with high-end loan structures. The existence of the SBA guaranty does not outweigh competent underwriting.
There are certain eligibility requirements within the SBA program which are prescribed by the SBA and apply to all lenders within the program. Beyond those, a lender will apply its own judgment and standards by exploring the 5 Cs (links to 5 Cs in each vertical blog)–which include character, capital, conditions, collateral and cash flow–of the business. A lender who knows your industry and the SBA has the specific knowledge needed to understand these components as they relate to business ownership and evaluate your entire financial picture to structure a loan that best meets your needs.
Myth: SBA loan options require extensive collateral.
When it comes to myths of SBA lending, this is a common one. While the SBA program guidelines do require lenders to take certain available collateral such as junior liens on real estate which has available equity, the program also specifically states that a borrower who lacks such collateral and is otherwise creditworthy should not be turned down due to the lack of collateral. Therefore, a business with only four of the 5 Cs noted above (i.e., lacking collateral coverage for the loan) can still obtain the needed financing. For those with little or no real estate to pledge, it is important to find a lender who is skilled at and comfortable with relying on the financial strength of the business for repayment. Lenders without an understanding of your industry will default to a real estate mindset or a mindset where they seek hard assets to secure a loan. It is important to find a lender who understands the value of your business through the lens of industry expertise.