SBA Loan Myths and Realities Uncovered

Myths have surrounded the SBA loan program for as long as it has been around. Now that they are back and many banks are actively funding them again, it’s time to revisit and hopefully put these to bed once and for all and to really understand what the SBA can and can’t do to help you.

Dispelling the myths is the goal of this article.

There are many ideas about what the SBA is and what it does, many of which are wrong. You need to make yourself aware of these so that you don’t go in under false pretenses or inadvertently raise unrealistic expectations.

Myth #1: The SBA is for Startups.

The most predominant myth is that the SBA is for start-ups and struggling businesses–in other words, for businesses on shaky ground. This is not the case. In practically all cases, you must demonstrate the stability and profitability of your business proposal. (The SBA specifically states it is “not actively seeking loans to businesses in existence less than one year.”)

The reason is that the SBA primarily issues loan guarantees to banks and other lenders. The SBA acts as a cosigner for the borrower–you. The SBA has its own requirements that must be met, and the lenders also require minimum qualifications before approving a loan, even with an SBA guarantee.

Because of this cosigner relationship, banks are growing ever fonder of the SBA guarantee. The stigma that used to be attached to SBA loans by the banks has disappeared.

Now, if you are a new business, this doesn’t mean you can’t get a loan. It just means that you have to be even better prepared and even more convincing that someone with an existing business has to be to get approved. But this is why many business start ups get turned down for loans, and why by using this guide you can greatly improve your chances of overcoming this hurdle.

Myth #2: It takes forever to get an SBA loan

Another myth regards the time required to go through the loan process. Many small business owners, for fear of red tape and perceived lengthy delays in obtaining approval, avoid the SBA. But if your proposal is properly submitted, actual processing will normally require three to six weeks, and a bank can usually release funds within a week after SBA approval.

It will take longer if you don’t have all your ducks in a row, if you haven’t filed recent tax returns, if you delay in getting back up information requested, etc. It can also sometimes take longer at certain times of year, but much of it is in your control, so don’t let the cause of delay be on your side.

Myth #3: The SBA itself will make loans if the bank won’t.

The SBA does make direct loans but only for very specific situations. The vast majority of SBA lending assistance takes the form of loan guarantees. The SBA will guarantee 80 to 90 percent of the lender’s loan amount in case you default. The two most common guarantees are the 7(a) Loan Program and the 504 Loan Program. Your local SBA office can direct you to lenders who participate in each.

SBA direct loans are targeted to particular categories of individuals or circumstances. They are normally difficult to qualify for, but if you meet the criteria and don’t fall into one of these denial traps, you should apply. Here are the principal reasons why the SBA will reject a loan application:

  • Funds are available elsewhere on reasonable terms.
  • Funds are to be used for speculation.
  • A portion of the business income is derived from gambling activities.
  • The loan will be used by an enterprise primarily engaged in lending or investing.
  • The loan is used to purchase real property to be held for resale or investment.
  • The loan is used to relocate your business for other than sound business purposes.
  • Some of the direct loans made by the SBA are issued to help businesses comply with environmental and safety laws and assist in cases of forced relocation. It also offers loans to minorities, and disadvantaged individuals. The terms of these direct loans always beat standard commercial loans, having lower interest rates and longer maturities.

Don’t count of getting a loan direct from the SBA though- these funds are in short supply. You should prepare to get your funding via an SBA guaranteed bank loan.

Myth #4: The SBA program is primarily/or women and minorities.

This is not true. The SBA guaranty programs are available for participation by all persons, regardless of race, color, creed, age, or ethnicity. In fact, 65% of all SBA loan guarantees were made for white males.

The agency does employ a relatively new initiative to encourage women and minority borrowers to utilize the program. These borrower categories are permitted to be pre-approved for loan guarantees before a lender has formally approved their loan requests. However, the agency does not provide any special funding allocations for these categories. Nor do women or minority participants receive any special consideration or credit-scoring that would provide agency assistance in a situation in which other borrowers would be denied.

Myth #5: Anybody can get an SBA loan.

There are limits in how big your business can be, your net worth, business profits, number of employees and industry segment, among other qualifiers. Participation with the SBA guaranty program is restricted to borrowers who qualify under certain conditions relating to the size of the small business concern and the nature of the business activity.

Borrowers seeking to benefit under the 7 (a) guaranty program are restricted by either gross revenues of $5.0 million (with some exceptions based on the industry of the borrower) or limited by 500 employees in some specific industries that are labor intensive, such as manufacturing. Questions of eligibility can be directed to the agency for clarification about specific situations.

Borrowers seeking to get assistance under the 504 Development Program are restricted by their average net income over the past three years (no more than $2.0 million annually, including affiliates) and net worth (no more than $6.0 million, including affiliates).

Businesses involved in real estate development, lending activities, gambling, and illegal activities are prohibited from receiving assistance from the loan guaranty program.

Myth #6: The government will monitor the business.

Fears of “Big Brother” cause many small businesses to hesitate about the SBA guaranty program. Participation with the SBA includes no monitoring of the borrower’s business activities, no government audits, and no inter-agency communications about the business operations.

The SBA does not have the interest, personnel, or mandate to provide any extraordinary supervision of the business unless the borrower is in default of the loan. When the borrower is in default, the SBA’s interest will be strictly focused on working with the lender to recover the loan.

Obtaining SBA assistance does not increase the borrower’s chances of being audited by the IRS or being examined by OSHA, the EPA, the Corps of Engineers, or any other government agency that regulates the operations of business and industry.

Basically, once you are approved, as long as you make your payments on time, no one will come around to bother you ever again from the SBA’s point of view.

Myth #7: The lender does not care how good or bad the business is.

This is totally false. Lenders participating with the SBA guaranty programs are responsible for making good loans. The SBA guaranty is intended to enhance a loan, not subsidize the lender to build a bad loan portfolio. An unguaranteed portion of every loan will expose the lender to the full risk of the credit, and that portion is likely to increase in the next few years as funding for this program is restricted. Collecting bad loans can be very expensive in terms of time and money.

Bottom Line

An SBA loan can be a great resource for many small businesses, but it does require some effort on your part. It is neither as easy nor as hard as some myths would have you believe. The point is, if you think you are a good candidate, investigate your options. And if it looks promising from there, apply for the loan and see what happens. It may be just the thing your business needs to reach the next level.

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