The loan programs provided by the Small Business Administration (SBA) have been the victim of a number misconceptions that make them appear cumbersome and unattractive to all but the weakest business borrowers. This article will attempt to correct these misconceptions and portray the program as one that every commercial real estate broker selling owner-occupied properties should be familiar with.
SBA Financing is a "loan of last resort"
The program is intended for credit-worthy borrowers who have difficulty getting access to financing at reasonable terms and advance rates. The SBA offers loan terms up to 25 years for a commercial real estate purchase, construction or refinance with advance rates up to 90%. For a small business with tight cash flow, the longer term can mean the difference between a monthly payment that will stretch their budget to the breaking point and one that can be easily managed. The 90% advance rate allows a business to more quickly build equity in a piece of real estate over paying rent as 10% down-payment can be saved much more quickly than the 25% to 30% required by most conventional lenders.
SBA Loans are only for the smallest of small businesses
The SBA has established "size standards" for what is considered a small business. The standards vary by industry, but they are up to $6,000,000 in revenue for most retail business and up to 100 - 500 employees for most wholesalers and manufacturers.Government data shows that 98% of all businesses in America would qualify for an SBA loan under these criteria. Loans for commercial real estate can be as high as $5,000,000. A business with 500 employees buying a $5,000,000 building might not sound like a candidate for an SBA loan, but it could be!
SBA Loans "take forever" to be credit approved and funded
I may have a hard time dispelling this myth for those of you who have experienced an SBA loan with a lender who doesn't specialize in these transactions. By working with the "right" lender, an SBA loan takes no longer to process than a conventional loan. As one might imagine, a government program like the SBA has lots of rules. There are rules about who is eligible for financing; rules about what can be financed; rules about what interest rate can be charged…more rules than I could ever convey in this brief article. A lender who "dabbles" in SBA has a greater chance of not knowing all those rules, or not having the processes and procedures in place to deal with those rules. Any bank and most credit unions can make an SBA loan, but a lender who processes only a few each year will not have the infrastructure to make loans efficiently. Look for a "Preferred Lender" also known as a "PLP" lender, which is an institution the SBA has given the authority to make credit decisions on behalf of the government. Most of these lenders also have dedicated staff who process only SBA loans and therefore have the expertise to handle loans as efficiently as a conventional loan. Go www.sba.gov to find information on your local SBA District Office. They can send you a ranking of the top lenders in their district. Choose one at the top of the list to ensure you're working with the best in the market.
SBA Lenders don't care about loans being repaid since the government guarantees the loan
Under the SBA 7(a) program, the government guarantees up to 75% of a loan with a maximum guaranty of $1,500,000. On a defaulted loan, the lender takes a loss on the balance over the amount of loan guaranty. In addition, the SBA holds lenders to strict delinquency and write-off standards to protect taxpayer money and will remove a lender from the "Preferred Lender Program" if write-offs are too high.
Since the SBA is a government program, all SBA Lenders are the same
In addition to the benefits of working with a Preferred Lender mentioned above, each lender has its own credit philosophy. While their credit guidelines must comply with SBA rules, lenders can impose stricter guidelines than the SBA and all do. Most credit criteria vary from lender to lender, including: advance rates, historic cash flow, types of properties financed, management experienced required, etc. For this reason, it is important to build a relationship with a top SBA lender in your market and learn about their particular credit parameters, as they will be different from other lenders in your market.
This article only scratches the surface on some of the benefits of the SBA program. I encourage you to find out who the SBA players are in your market and get in touch with them.
About the Author
Through CIT, Ed Piszko provides SBA guaranteed financing for business sellers to enable an exit strategy and funding for business buyers to acquire existing businesses or for start ups. Ed can be reached at [email protected].