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SBA Loans: Myths & Reality

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There’s a lot of misinformation about SBA Loan Programs. This article will help you understand why participating in an SBA Loan Program now might be the right direction for you.

COVID-19 UPDATE: As part of the pandemic recover, the SBA is waiving the borrower guarantee fee for SBA 7(a) loans. AND the SBA will make the first $9,000 towards borrower monthly payments on new SBA loans for 3 months. This is treated as non-taxable income. New loans must be approved before September 30, 2021, or as long as SBA program funds are available.

MYTH #1: The SBA makes direct loans to businesses.

REALITY: So-called SBA loan programs are actually loan guarantee programs. The actual loan is made through a lender that has been qualified and approved by the SBA and who conforms to SBA underwriting guidelines. The SBA may guarantee up to 75% of the loan you are seeking; however, the big advantage of the SBA Loan Guarantee is that it enables the lender to finance more of your real estate, with LTV up to 90%.

MYTH #2: SBA loans are grants from the government that I won’t have to pay back.

REALITY:  An SBA loan is not a grant. Not only the SBA, but also the lender, will expect that the loan be repaid. In fact, the SBA requires the borrower (called the “Sponsor”) to back up the loan as a “guarantor”; meaning they fully expect you to make good on your word to repay the loan.

MYTH #3: SBA loans are for small business use only; they cannot be used for real estate.

REALITY: The SBA 504 loan program is designed specifically for the purchase of “fixed assets” including commercial/industrial real estate used for business. In addition, both the 7(a) and the 504 programs can be used to expand or modernize facilities, or construct new facilities or refinance an existing property that is used for your business. The key is that the owner’s business must occupy at least 51% of the property.

MYTH #4: SBA loans cost more than regular bank loans.

REALITY:  The SBA has been adamant that business owners are not charged application or bank management fees. The SBA charges the lender a fee for providing the guarantee on the loan. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. The lender has the option of passing this fee on to the borrower, however, this fee, if passed on, can be included in the loan balance and makes a very small difference to the borrower.

As far as interest rates go, the SBA limits how much interest a lender can charge to a borrower. With an SBA loan, a borrower can be approved at fixed or floating rates. A borrower also has the benefit of lower down payments, flexible payment options and no balloon payments.

MYTH #5: The SBA helps people with bad credit get a loan.

REALITY: The SBA requires a good business plan (showing good cash flow) and good credit history. The goal of the SBA is to provide assistance when a borrower’s collateral may not meet conventional lending standards. An SBA guaranty helps overcome some financing challenges but not bad credit history.

MYTH #6: Three declined letters from different lenders are required!

REALITY: This myth holds that your SBA loan will not be approved unless at least three different lenders have turned you down. In fact, the SBA prefers that you have not been declined by any lender. Rather than being the lender of last resort, the SBA feels strongly that they are the first lenders small business owners should approach.

MYTH #7: It’s all the same program, so I can get an SBA loan anywhere.

REALITY: SBA loans require “full documentation,” which can be a complex process. Banks, and non-bank SBA Lenders, that have earned the Preferred Lender Program (PLP) status can help you save time and reduce complications. Further, not every SBA lender offers loans to start-up businesses or loans for new construction. If the SBA is right for you, make sure that you’re working with a lender that really knows the program and handles you specific scenario. This is your best shot at a good outcome.

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While SBA loans are sometimes viewed unfavorably by borrowers, many of the myths and misconceptions surrounding them are based on rumors and mistruths. In reality, SBA loans can be a viable option for many business owners. For businesses that can qualify, they offer a long-term, fully-amortized, fixed monthly payment solution to support the acquisition or refinance of fixed assets and other business needs.

If you think you might be eligible for an SBA Loan Guarantee Program, please CONTACT US for a no-cost loan request evaluation. SCV works with 4 of the top 5 SBA Preferred Lenders, as well as a number of smaller banks offering SBA loans. Our lenders are extremely responsive. In most cases, you will have an answer in 48 hours or less.