With "sub-prime" entering into the national lexicon and devastating many of the world’s financial institutions, it should not be surprising that there has been a direct affect on Small Business Administration (SBA) lenders as well. Many of these lenders joined in the lending exuberance of their mortgage cousins and are now feeling their pain. Some lenders have backed out of SBA loans altogether, and others tightened their requirements to the point where no one who actually needs the money would qualify to borrow it.
Yes, this does make it more difficult for buyers to buy businesses (and sellers to sell), but it is not impossible to get an SBA loan even in today’s market. Often when prospective buyers make an offer on a business, they decide they want to reward their current business banker by getting their SBA loan from them. This may or may not work out well for the buyer depending upon their bank’s expertise in doing SBA loans.
Before expanding on the last statement, let’s step back and have a very brief overview of SBA lending. Any lender can participate in the SBA loan guarantee program (where the US government guarantees up to 85% of a loan’s value to the private lender issuer), but that does not make all lenders equal in the eyes of the government. If they are merely a participating lender, 100% of the authorization remains with government. It also means that they are inexperienced at issuing these loans. The most active and expert SBA lenders qualify to be part of the SBA's Certified and Preferred Lenders Program. These participants are given partial or full authority to approve loans, which means borrowers get their money faster. Among the criteria for Certified lenders is their heavy involvement in regular SBA loan guarantee processing. They receive a 36-hour turnaround on loan applications. Certified lenders account for 10% of all SBA loan guarantees. Preferred lenders are selected from the SBA’s best lenders and enjoy full delegation of lending authority. They must re-qualify for this status every two years, and the SBA periodically examines their lending profile. Preferred loans account for 18% of all SBA loans.
So if a buyer’s bank is not part of the Certified and Preferred Lender Program, the bank must first internally approve the loan application, and then it is forwarded to the SBA for their authorization. Unless the bank is particularly aggressive in its lending practices, that internal approval could take weeks, if not months if there are any questions about the application. From our experience, the worst part of working with these inexperienced lenders is what we refer to as the “slow no”: Every indication from the loan representatives is that things are going well, they just need this or that piece of information, which they ask for one at a time over 2-3 months, and then they decline to fund the loan.
In buying or selling a business, time is key. The wrong choice of lender could cost the buyer the company he/she has always dream of owning. All the Preferred Lenders we work with guarantee a 48 hour internal review and preliminary decision. That means in 2 days we know if the loan is going to fly, subject to satisfying the underwriting criteria. If it is a yes, then the paperwork processing begins. If it is a no, then we go to a different lender. Time is not wasted either way.
When searching for an SBA lender, the best place to start is by asking business brokers who they prefer to work with. This will let you know who has their proverbial ducks in a row and can get deals closed. If you want to also explore some avenues on your own, the first question you ask should not be, "Do you do SBA loans?” but rather, "Are you an SBA Preferred Lender?".
The money for small businesses is still out there, it is a matter of finding it. Using the resources at your disposal will make the search much easier.