I had an interesting and troubling conversation with a prospective business buyer (during an initial business purchase financing consultation over the phone) the other day. He's looking for funds to purchase a restaurant and has two possible for sale candidates in mind. He has a strong resume in the food service business and enough cash for part of a down payment. He recently met with someone at a local bank, asked about getting an SBA loan and was told he has to contact the Small Business Administration. The banker explained that his organization does not make SBA loans, that the borrower has to get the approval from the SBA which then supplies the money to the bank and the bank pays it to the loan recipient.
Wrong on several counts! In fact that bank certainly does make SBA loans from its funds. I know because I've worked with it when helping clients get money they need through the SBA lending program so they can buy a business. The individual this buyer spoke with either does not know that, or did not want to be bothered. And he clearly does not know how SBA loans work.
In fact, I continue to hear people talking about SBA loans in a way that demonstrates they are not informed of the truth. That reminds me of how important it is to dispel some of the myths relating to the idea of a business buyer getting a loan through the SBA program to complete a purchase.
1. Go to SBA for Loan: As to the comments heard from the uninformed banker mentioned above, the fact is that the process begins and ends with the bank or other financial institution where the entrepreneur turns in the loan application and from which he or she borrows the funds.
The role of the SBA lending program is to encourage small business purchases and expansions. It does that by guaranteeing the lending institution that in the event its borrower defaults, the SBA will reimburse the lender for most of its financial loss on the loan. That guarantee, by reducing the risk to the financial institution, improves the likelihood that it will consent to make business loans.
2. Any Financial Company Can Offer SBA Loans: Another myth is that you can get a loan that is guaranteed by the SBA from most any bank or lending institution. In fact, most lenders are not authorized to offer SBA loans. In order to do so, a financial services company must apply to the Federal agency to be included in its lending network. The SBA will then evaluate the institution and determine whether to allow it to offer SBA loans.
And the notion that companies offering SBA loans can make only SBA approved loans also is false. Many business lenders have several "products" they offer to borrowers. Most of their customers prefer "conventional" (non-SBA) loans because the conventional application is usually simpler and easier to prepare.
3. Slow to Approve and to Fund: That's the understanding of people whose experience involves inadequate knowledge about how to prepare and submit an application that is approval-ready. Borrowers who've worked with a business purchase financing specialist experienced in helping buyers obtain SBA funding, will have a different view. For example, one of the SBA programs is the Express Loan, which can be approved quickly, if all information and requested documents are submitted with the application. The slow-to-fund problem may have more to do with the lender's "turtle pace" than the time it takes to get the SBA okay.
4. Only for Limited Purposes: Whether it's a borrower wanting to expand a long-held business, or a new entrepreneur who wants to get into a business, there probably is an SBA loan that will address the need. The range of loan amounts, interest rates and the purposes for which the money is to be used are pretty broad and apply to any number of businesses types. The SBA loan may be used to purchase, expand, change, or equip an existing business, to buy real estate with a business purpose, to fund disaster recovery, and for many other types of needs.
5. Borrower Needs Real Estate Collateral: That commonly held belief is simply not true. When reviewing an application for an SBA loan to purchase or expand a business, the underwriter's most important factors are the quality of the business and the experience and credit history of the borrower. Real estate and other valuable collateral is required for many if not most conventional loans. And while the SBA and the lender are always pleased to accept property as security for a loan, the purpose of the money is to acquire or expand a business. And the future viability of the business, and its ability to generate the cash needed to make the loan payments, often is the number one criteria on which the loan decision is made.
Anyone thinking of buying a business and considering the idea of using an SBA loan for some of the financing should get all the facts about tapping that source of needed capital, rather than believing the myths that have grown up around this topic.