Dispelling the Myth About SBA Loans

I cannot tell you how many times I have heard small business owners say that they have not pursued SBA loans, because they take too long to procure, and the paperwork is massive. Do you know what a lender requires to process a conventional (non SBA) loan request? If so, the information is virtually the same for an SBA loan request. How did the myth about more time and paperwork get started? Most likely, the main reason is that the SBA loan program used to be one where a small business borrowed funds directly from the government.

Today, however, the SBA direct loan program is limited primarily to disaster relief. Most SBA loans for small businesses are now processed by banks, credit unions, and licensed non-bank lenders through an indirect loan program called the SBA 7(a) loan program. SBA 7(a) loan proceeds are available in any amount up to $5 million for any eligible small business and for any legitimate business purpose. Instead of going directly to the U.S. Small Business Administration to borrow government funds, the small business now goes to a participating lender who will loan their own funds using SBA forms and guidelines.

The participating lender will receive a partial government guaranty for the loan, and this allows the lender to approve terms with lower down payment requirements, longer repayment terms, and more relaxed underwriting guidelines than a non-guaranteed or conventional loan. If the lender has been qualified by the SBA under the Preferred Lender Program (PLP), that lender now has the authority to approve loans on behalf of the SBA. Loan requests, which may have languished for six months under the old direct SBA government loan programs, can now be approved in as little time as two weeks.

There are a couple other reasons why small businesses may have the perception that SBA loan processing is overly time consuming and paper intensive. One reason is that all business loan requests generally require more time and paperwork than a consumer loan request. Relatively speaking, SBA loan processing times should not be significantly more burdensome than any other type of commercial loan request, because the information required for underwriting is essentially the same.

Some lenders, however, are not experienced with SBA lending, and they have not earned the PLP designation. In those situations, the small business borrower may be their guinea pig for a new loan program. Another reason for the misconception may be that SBA has another government-enhanced loan program called the SBA 504 loan program. The SBA 504 loan is not available for all business purposes. It is only available to finance real estate and equipment. The 504 loan is not government guaranteed. The 504 loan structure includes a lender’s conventional first lien loan, for approximately 50% of the project cost, combined with a government-backed debenture for the remainder of the project’s loan proceeds. A 504 loan application must be processed by both the participating SBA lender and an SBA Certified Development Corporation (CDC) which funds the debenture. Due to the need for underwriting separately by the participating lender and the CDC, with final approval by the SBA, the 504 loan request can be much more time consuming and paperwork intensive than the more popular SBA 7(a) loan program.