7 Myths About SBA Loans
Most small business owners have considered financing at some
point in the life of their business. You may have considered expansion,
buying new equipment, more inventories, purchasing real estate,
or just looking for a new capital infusion.
But the confusion surrounding SBA loans
may perplex or frustrate even the most astute entrepreneur.
Conflicting information from your trusted advisors or the
internet may not help to bring you closer to separating
fact from fiction.
There are many myths surrounding SBA loans. 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. You may recognize yourself
in some of the following misconceptions of SBA loans. You will
finish this article more informed and in possession of the facts.
The facts regarding SBA loans can help you to be a better, more
successful small business owner.
The U.S. Small Business Administration (SBA) was created
in 1953 as an independent agency of the federal government
to aid, counsel, assist and protect the interests of small
business concerns, to preserve free competitive enterprise
and to maintain and strengthen the overall economy of our
nation. 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. Through an extensive network
of field offices and partnerships with public and private
organizations, SBA delivers its services to people throughout
the United States, Puerto Rico, the U. S. Virgin Islands
THE 7 MYTHS
Myth #1- All banks evaluate the risks of a SBA loan request
with the same viewpoint.
Financial Fact- Although all banks are subject to the same
SBA Guidelines, the rules are subject to different interpretations
with respect to analyzing a particular loan request. Some
banks may be willing to take greater risks. 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 #2- All banks offer the exact same types of financing
for SBA loans.
Financial Fact- Loan pricing and structure can vary substantially
at different banks. Interest rates on SBA loans are based
on the prime rate plus a margin. Some banks are more competitive
in price to be leaders in SBA lending. Some banks will carve-out
a provision for accounts receivable and inventory financing
from their loan agreement to permit additional third party
commercial financing in addition to the SBA loan. For the
same loan, some banks will require additional collateral
guarantees, such as a lien on your house. Evaluating the
adequacy of such additional collateral guarantees is also
subject to interpretation.
Myth #3- It takes too long to get through the red tape
of SBA loans.
Financial Fact- This may be true if the bank has to deal
through the SBA bureaucracy. Many lenders have "delegated
authority" to directly approve a SBA loan. They can
provide a full written loan proposal within 48 hours, and
some provide a loan commitment within a week of receiving
a full loan package. Closing the loan depends on the specific
requirements of each transaction, but takes no longer than
closing a conventional commercial loan. If the loan requires
an appraisal, this may add several weeks to the process.
Myth # 4- SBA loans are only for start-ups or small companies,
and not for "big" companies.
Financial 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. For example, in
the manufacturing and mining industries, a business can
have no more than 500 employees to qualify. Average receipts
in most retail and service industries can total no more
than $5.5 million. The SBA size regulations are located
at sba.gov. Most lenders can tell you immediately if your
business qualifies regarding income and number of employees.
Myth #5- SBA loans require a lot of collateral
Financial Fact- SBA lenders do consider collateral when reviewing
a loan application, but they also look at several other factors.
Your character, your creditworthiness with respect to you history
of paying your debts, your management capabilities, 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 you application. If you
are a sole proprietor, having a low FICO score can hinder the
loan process. Hiring a credit
repair specialist before seeking a loan will help in some
cases. Ultimately, your ability to repay the loan from your business's
cash flow is the most important consideration.
Myth #6- SBA loans are loans from the Federal Government.
Financial Fact - SBA loans come from commercial lenders
who participate with the SBA in SBA lending. The Small Business
Administration is an agency of the executive branch of the
Federal Government. It establishes guidelines that lenders
must follow when giving SBA loans and the SBA backs each
loan with a guarantee that eliminates some of the risk to
the lender. The actual funds for each loan will come directly
from the financial institution. The SBA loans are backed,
up to the amount of the guarantee, by the SBA.
Myth # 7- SBA loans are a loan of last resort.
Financial Fact- Lenders that offer SBA financing should
be one of the first places a start-up or small business
owner goes when seeking a business loan (unless you have
a friend or relative willing to invest in your business).
The express purpose of the SBA is to help Americans start,
build, and grow businesses in order to promote a healthy
economy. SBA loans are structured with longer terms, lower
down payments, and can have lower rates than conventional
commercial loans so small business owners have increased
cash flow. Going to a lender for a SBA loan is especially
valuable for business owners seeking loans who may not have
collateral required with typical commercial loans. There
is a reason the SBA is the largest single financial backer
of U.S. businesses in the nation.
You need to assess your business's current health and growth
potential. Would it benefit your company if you refinanced
old debt? Could you increase business with more equipment?
Would a facelift bring in more customers? Would a combination
of SBA financing with commercial financing for accounts
receivable and inventory help you succeed?
It is critical to your business that you know not only
when to seek financing, but how much you will need, and
what is available. Many businesses suffer of even fail because
their owners do not take out loans when they need to; or
they fail because their owners do not borrow enough. Understanding
your options will help you determine these things, which
can in turn help your business flourish.
Conclusion: an experienced Commercial Finance Broker can
help you separate the myths from the financial facts. They
can find the best SBA loans. They can evaluate the best
overall financing structure for your particular situation
with lower interest rates, longer payback times and lower
upfront costs. They can help you understand the big picture
and create new opportunities for your consideration.
© 2007 Gregg Financial Services
Mr. Elberg is
a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial
finance companies and banks that fund B2B businesses. Mr.
Elberg arranges funding from $25,000 to $50 million per
month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about
GFS, please visit our website: www.greggfinancialservices.com