SBA Loans: Myths and Realities

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Complicated, lengthy paperwork. Agonizingly long closing periods. That's the U.S. Small Business Administration (SBA) loan process, right?

Not necessarily, says Susan Stoneburner, president and CEO of Anaheim, California-based Pacific Design Directions.

In February 2000, Stoneburner closed an SBA-backed real estate loan in just 60 days for her firm, which designs, builds, and constructs commercial and industrial tenant improvements. If a business owner understands the process, and comes prepared with the right paperwork, the process can be relatively painless, she says. "It's all about communication and documentation," Stoneburner adds.

Stoneburner credits her bank, Fullerton Community Bank, for helping her secure the loan she needed quickly and without hassle. Since Stoneburner didn't qualify for a loan through typical lending channels, the bank, a preferred SBA lender, steered her towards an SBA-guaranteed loan for the $1 million she sought to buy and build out a commercial building.

"I had never purchased a commercial building before," says Stoneburner. "Luckily, I worked with two people who did this [ SBA lending] for a living," she adds. The experienced duo coached her through the paperwork and helped her meet the tight deadlines associated with purchasing real estate.

Having her financial house in order was a huge plus when applying for approval, Stoneburner says. "I've been in business for 20 years, so the paperwork I needed was at my fingertips." For any type of loan you need to produce backup of what you're worth, and Stoneburner was prepared with an up-to-date profit and loss statement, balance sheet, and other relevant financial statements. Once bank officers had these in hand, Stoneburner's loan could be processed easily. " If you're dealing with good people who know how to process the loan, that translates to success and expediency," Stoneburner says.

Stoneburner was lucky to have complete financials at the ready and to have knowledgeable people guiding her through the process. Entrepreneurs less familiar with the SBA program, however, often shun SBA-backed loans because of a range of misconceptions. By understanding what the SBA does and doesn't do, and how the lending institution influences the loan guarantee process, small-business owners can be in a better position to take advantage of this often misunderstood government program.

Here are 6 Common Myths about SBA loans:

1. The SBA oversees a pool of free money.First and foremost, says Jim Hammersley, director of the Office for Loans Programs at the SBA, "We don't make grants." He regularly hears from business owners looking for free money, which is not what the SBA is about. "We do look for people to pay loans back." The agency also expects people to put up some collateral, though a lack of collateral in and of itself is not grounds to turn down a loan. The SBA guarantees loans based on factors common to any credible lending institution: a well-thought-out business plan, management experience, good character, and an owner's willingness to take a stake in the business, among others.

2. SBA interest rates are too high. According to Tom Burke, Wells Fargo's SBA-lending manager in Minneapolis, the SBA puts ceilings on interest rates. For instance, the maximum rate is prime plus 2.25% for a loan of less than seven years and greater than $50,000. If the term is seven years or greater and for more than $50,000, the maximum is 2.75% over prime. "The SBA wants to make sure money is as cheap as possible," says Burke. Interest rate tiers are based on the loan's size, and rates are negotiable up to the ceilings, he adds.

3. You have to be a business in distress to qualify. A business doesn't have to be failing to get its loan approved, according to Burke. "The SBA is not a bail-out program," he says. Usually, an SBA-guaranteed loan helps a business owner bridge a gap: a lack of collateral, for example, or the need for an extended loan term.

4. The SBA is only for start-ups. While SBA lenders do make loans to start-ups for the purchase of business assets including the purchase of existing businesses, it's also a great resource for established businesses looking to secure working capital. Some of the biggest borrowers in the SBA's real estate loan program are established dentists and doctors who want to buy offices, says Jim Roby, the Florida regional government lending products manager for Bank of America, of his bank's SBA-lending program. In general, banks don't make term loans for working capital; most only provide revolving lines of credit, says Burke. "The SBA wants the small-business owner to succeed," he adds. "The loans are good for fast-growing businesses who need working capital, too."

Last updated: Dec 20, 2001




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