Debunking the Myths Related to SBA Loans
Business owners looking for cash flow are smart to investigate their options in lending. I’ve asked my golfing buddy and colleague, Eric Hjalmquist from Radius Bank, to give us a little insight on SBA loans. Here is what he had to say.
I’ve been in the SBA loan business for over 20 years and one thing has never changed: Business owners and entrepreneurs alike have a certain disdain for SBA loans.
In all my time in the business, I have never heard someone say “Wow! That was such a great experience! Can we do that again?” However, if SBA loans are so bad, then why did more than 70,000 borrowers take out over $29 billion in loans last fiscal year??
I’d like to “debunk” some of the myths and objections I’ve heard over the years about SBA loans to give you a better idea if this is an option you should pursue.
“SBA loans require a lot of paperwork”
The truth here is that any type of loan requires a lot paperwork. Think about the last time you applied for a home mortgage. SBA loans do require filling out some specialized forms that are unique to the process but over recent years the process has become very streamlined. If you work with an experienced SBA lender, they will walk with you the process.
TIP: It is a good idea to ask your bank how many SBA loans they originate on an annual basis. If the number is more than a couple dozen, then most likely they have a well experienced back office that knows how to assist you with the forms.
“SBA loans take a lot of time”
Any commercial loan can take a lot of time to close depending upon the circumstances. For instance, if you’re purchasing commercial real estate, things like appraisals and environmental studies can add a few weeks to the timeline. In addition, permitting processes like building permits and liquor license may need to happen before the loan can close. The thing to remember, however, is that these are not requirements that are unique to SBA loans. Any conventional, non-SBA loan is going to have these same requirements. A lot of the reason why the notion exists about long timeframes, could also harken back to the day when a bank making an SBA loan had to physically send in a “package” and formally apply to the SBA for their guarantee on the loan. The bank, borrower and all other parties were then faced with the prospect of waiting weeks for the SBA to sign off on the loan. The good news is that with the advent of “Preferred Lender” status, those days are in the past.
TIP: Banks with a “Preferred Lender” status have unilateral or delegated authority to approve the loan without having to send it into the SBA and wait for the approval. When working with a lender, it’s a good idea to ask them if they have SBA “Preferred” status.
“The fees are too high”
This comment usually arises in referring to a fee that the U.S. Government charges for use of the program. It is called an SBA Guaranty Fee and it goes to help subsidize the program. SBA is a government agency that has been in existence since the 1950s and is considered as one of the most successful, long-running programs at the federal level. Other than the potential/contingent cost to the feds for providing a 75% guaranty on the loan, the agency is essentially run at what is known as a “zero subsidy” for the federal budget. The fee formula for SBA loans ranges from 2% up to 3.75% of the guaranteed portion of the loan. As an example, a $1 million dollar SBA loan would have a guaranty fee of $26,250 (3.5% of 75% of $1,000,000). That might seem like a lot but the borrower is going to get a good value in return for that fee. Specifically, SBA loans typically come with lower down payment requirements and longer amortizations and maturities than typical conventional loans.
TIP: If you are financing a piece of commercial real estate, you won’t have a balloon due in 3 or 5 years that you might be required to re-finance to another lender if your current bank wants you out. Instead, with an SBA loan you will have a fully amortizing 25-year loan with no balloon requirements. That is a valuable feature to a lot of small business owners!
In summary, next time you hear the words “we do SBA loans”, I encourage you to re-think the biases that are out there or that you may have heard. After all, 70,000 borrowers with $29 billion in reasons can’t be all wrong!!
Eric Hjalmquist is Vice President, Small Business Lending, at Radius Bank. With more than 25 years of small-business lending experience, his loan origination volume exceeds $500 million. For almost half his lending career he worked as a vice president and business development officer with a national Small Business Administration (SBA) lender. Eric has worked with funding of new franchises, as a credit analyst, commercial loan officer, and in public accounting. Eric and his family live in Aurora, Colorado.