SBA loans: Explaining the truths, debunking the myths

Launching or growing a small business can be a pivotal time for entrepreneurs and owners. Acquiring funding can be another story. Fortunately, you have a powerful ally. Small Business Administration (SBA) loans are a great way for small- to medium-sized businesses needing capital to find financing with the help of backing from Uncle Sam.

The truth about SBA loans can be empowering for small businesses. Generally, an SBA loan provides the opportunity for a longer-term loan and a lower monthly payment, allowing business owners to borrow a larger amount over a longer payoff period.

Financing is not provided directly by the SBA. Loans are funded by a bank or other lender under guidelines provided by the SBA. Working with partner institutions, the SBA helps lower the risk for lenders by guaranteeing the loan and making financing easier to attain for small businesses.

“The SBA guarantee provides a secondary source of repayment to the bank, which allows us to expand our credit criteria when the applicant doesn’t qualify under conventional lending guidelines,” said Gloria Miller, Senior Vice President and SBA Lending Manager for California Bank & Trust. “If there’s a weakness or two in the loan application, the guarantee helps get it over the hump for approval.”

“For example, a business may seek out a longer term to reduce monthly payments or may need a government guarantee if the available collateral is insufficient to secure the loan,” Miller said. “It also allows a lower down payment, so a business can retain more cash or capital to support growth.” 

Almost any business entity or structure is eligible for a loan. Despite conventional wisdom, it doesn’t matter if your company is a sole proprietorship, partnership, LLC or corporation

“We were able to help a media company that had lost their lease,” Miller said. “By financing the acquisition and renovation of a building, they were able to create the perfect ‘creative space’. They needed to accommodate their growing business while locking in their occupancy expense to protect from ongoing rent increases or lease terminations. The owners also are able to benefit from appreciating real estate values.”

While your lender can help match you with the right loan for your business needs, Miller emphasized that applicants need to know what they want in advance.

“Business owners should do some homework and understand what they are applying for,” she said. “Be prepared for how much of their own funds they are willing to invest.”

Among the other myths that have circulated is the notion that only “small” businesses can qualify for this type of loan. The SBA does have loan qualification parameters but businesses with up to $5 million in net income after tax and up to $15 million in tangible net worth can qualify. 

“If the business is a manufacturer, the size standard allows companies with up to 1,000 employees to qualify,” Miller said. “We rarely receive a request from a business that does not qualify due to size.”

Another misconception is that an SBA is the “lender of last resort.” On the contrary, these loans merit close consideration to gain the benefits of a lower down payment and longer term—both of which are key to growing companies.

“Most businesses are eligible with the exception of non-profits, speculative investments and certain other industries such as lending institutions,” Miller said. “Any business planning to expand or in need of growth capital is a great candidate.” 

Additionally, a personal guarantee is required from every owner holding at least a 20% ownership stake. The personal guarantee posts owners’ finances and assets as collateral if the business can’t repay the loan. In addition, some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender before requesting a loan.

Miller’s biggest advice is to make sure the firm has secured the services of a bookkeeper or accountant for accurate financial reports well in advance of approaching lenders for a loan.

“Business owners who use financial software without understanding accounting sometimes generate financial reports that don’t make sense,” she said. “Banks require three years of historical financial statements, so it’s wise to plan ahead. Even if you’re not borrowing now, you may need to provide credible financial statements in the future.”

Miller also warns against accumulating debt before applying for an SBA loan. Taking out auto loans and opening credit card accounts prior to asking for the loan can affect credit scores and debt ratios used to evaluate creditworthiness.

“There’s nothing more frustrating than running credit and seeing a loan for a new luxury car,” Miller said. “Try to keep personal expenses down and avoid taking on unnecessary personal obligations like heavy credit card debt.” 

The SBA website offers a loan application checklist you can use to gather your documents, including tax returns and business records. Here are some of the other documents you’ll need for your application:

• SBA’s borrower information form
• Statement of personal history
• Personal financial statement
• Personal income tax returns (previous three years)
• Business tax returns (previous three years)
• Business certificate or license
• Business lease
• Loan application history

There are many ways to grow your business and an SBA loan can prove to be a highly useful option to help you get there. You may want to start with one of the leading banks or other lenders participating in the program as a Preferred SBA Lender. Under this designation, a lender must demonstrate knowledge and proficiency in SBA requirements with regard to eligibility, credit underwriting, closing and servicing. The lender also must show that the bank has the management, controls and financial capacity to make and service loans funded under the program.

Getting help from an experienced banker can help you navigate the process successfully. Talk to a banker who can answer your questions and provide the guidance you need.