Small Business Administration (SBA) loans are a great option for small businesses, especially when the bank they work with is fully committed to helping them find the best SBA loan program for their needs. However, large banks have been focusing on originating larger, conventional loans over the past five years. So what can small businesses do to get their share of SBA loans?
“This tendency toward larger conventional loans may make it more difficult for businesses that need a smaller SBA loan to get the funding they need,” says Dell Duncan, commercial banker at First Federal Lakewood. “That’s why it’s crucial for banks to support small businesses through the loan process.”
Smart Business spoke with Duncan about some common misconceptions that exist when it comes to the loan process and what businesses can do if they’re interested in SBA loans.
How might lenders’ current perspectives affect smaller businesses looking for loans?
Not all business owners understand the different types of loans that are available for them when they go to a bank looking for financing. They often rely on business bankers to recommend loan products that would be a good fit for the business. It is possible that given a business’ size or loan amount requested that not all options may be recommended, which usually can be attributed to the options or expertise that a particular bank or banker offers.
What misconceptions do businesses have about SBA loans?
The most significant misconception that businesses have is that SBA loans are very expensive. SBA loans tend to have a slightly higher interest rate because often businesses that are applying for these loans are unable to qualify for a conventional loan. The higher interest rate is there to offset the risk.
Another significant misconception is that SBA loans take a long time to process, which can be the case if the lender is not a preferred lender. Once a participating bank has all the applicant’s information, the approval process is as fast as that of a conventional loan, given that the bank has addressed up front any of a business’s eligibility issues before submitting. The SBA’s Express Loan Program, which can finance loans up to $500,000, is an exception because it has immediate approval.
Businesses also often misunderstand that the term ‘small business’ is relative and that the loan size standards are larger than many would-be applicants tend to assume. However, it is the lender’s responsibility to confirm business size standards, meaning that they should work with businesses to check the qualifying criteria before pursuing an SBA loan to see if they’re a good candidate, rather than assume they’re not.
Depending on the industry the business is in, qualifying sales could be as high as $15 million or $5 million in net income. Those criteria cover a high percentage of the businesses in the country.
What should businesses do if they’re interested in SBA loans?
Businesses that believe that an SBA loan is a good fit should do their diligence and talk with their lender about SBA loans as a financing option. There are multiple loan programs available that can meet many purposes — lines of credit for working capital, term loans for equipment, and real estate loans for owner-occupied properties, for example. Additionally, the Small Business Administration offers flexibility when it comes to repayment.
Businesses should also look to work with a bank that is fully committed to promoting the variety of SBA programs that are out there, which tends to be the case with community banks. Doing so is likely to maximize the probability that the business is getting the necessary financing, as well as receiving a repayment structure that works for well for their business. ●
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