Six Things to Know Before Seeking an SBA Loan

by Mark Vernallis

There is an enormous amount of information available on the internet about SBA loan and acceptance criteria. However here is some practical knowledge that will be helpful in finding the right SBA lender.

Find the Right Bank

While SBA loans can cover as much as $5 million in financing and from the government’s perspective is a one-size fits all program that’s not the case when you bump into a particular bank for an SBA loan. Why? Some banks tend to gravitate to doing large numbers of smaller, under $50,000, SBA loans. It’s their style and they want to display a high level of activity particularly in underserved credit markets. Other banks look at SBA loans as another product in their business banking toolkit. Finding out the SBA lending preferences for banks in your area will save a lot of time.

Time to Close

Whatever the banker says will be the time to close an SBA loan, double it. Even if it’s a very active SBA lender that has in-house credit approval ability. If that time does not work for your situation, move on or run the down the SBA path in parallel with other funding options.

Personal Guarantees

Business owners are often put off with required SBA personal guarantees and even pledging a residence as collateral. First, unlike almost any other banking product, SBA loans have no covenants, so a default is virtually impossible so long as payments are made. Second, in practical terms the SBA and the sponsoring bank are loath to initiate default actions. Even if the borrower runs into difficulty making payments it is rare that the bank and the SBA don’t cooperate and restructure. Even in a bankruptcy, so long as the borrower is cooperative, it is unlikely that the relationship will turn nasty.

Air-Ball

The SBA will finance an ‘air-ball’, that being a less that fully collateralized loan. This is very useful when acquiring, say a service business that has few tangible assets. The SBA will ask for all the personal collateral it can get its hand on, but that would happen with or without an SBA facility.

Personal Guarantee Threshhold

Owners with less than a 20% equity interest do not have to provide personal guarantees. If the business has multiple owners, the ownership structure can often be re-organized to minimize the personal guarantee requirements.

Consider Leveraging Your Residence

The SBA will not put a lien on your residence if the outstanding debt is 75% or more of fair market value. This little-known fact is often overlooked. Therefore, taking out a home equity loan to leverage a personal residence can insulate the borrower from having a lien on their home. This typically applies to investment real estate as well.