By Paul Arsenault
There are probably more myths about Small Business Administration loans than there are Greek legends. The two most popular programs are the 7(a) and Low Doc.
The 7(a) Loan Guaranty Program is the SBA’s primary business loan program. The SBA guarantees up to $750,000 of a bank loan: as much as 80 percent on loans of more than $100,000.
The Low Doc or Low Documentation Loan Program offers a one-page SBA application form and rapid turn around on approvals of loans up to $150,000.
Both programs have certain restrictions and qualifications. However, they are not nearly as difficult to participate in as we may have been led to believe.
Myth 1: Most loans come directly from the SBA.
When someone says they got an SBA loan, the almost always mean they obtained a bank loan that is guaranteed by the SBA. Of the several billion in loans the SBA participates in each year, only a fraction of them are directly to the borrower. Under the two major programs the SBA offers, 7(a) and Low Doc, the SBA guarantees up to 80 percent of the loan if the borrower defaults.
Myth 2: An SBA Loan won’t help with cash flow problems.
Loans guaranteed by the 7(a) or Low Doc programs may be used for both fixed assets and working capital. Generally, they allow a longer amortization of the loan which helps enhance cash flow. Also, unlike many other State and Federal loan programs, the 7(a) and Low Doc programs do not have any community or job impact requirements. In other words, you do not have to guarantee a certain number of jobs to qualify.
Myth 3: You have to be a member of a minority group to get an SBA Loan.
Eligibility under the 7(a) and Low Doc programs focuses on what you do, not who you are. Eligible businesses include manufacturing, wholesale, retail, service and hospitality. Ineligible businesses include real estate developers, “opinion molders” such as newspapers, colleges and financial institutions.
Myth 4: Bankers don’t like SBA loans.
Whenever your loan application is rejected, you should ask whether that bank would be willing to make the loan through the SBA. Some bankers are not familiar with SBA programs and prefer to remain ignorant; others set their minimum loans high enough to discourage the participation of most small business. But for many bankers, the fact that the SBA can eliminate up to 80 percent of their risk makes it worth the extra paperwork. If you have difficulty finding a bank that is willing to use the SBA program, ask your local SBA office, or go to the SBA site on the internet and obtain a list of lenders that regularly participate in SBA programs.
Myth 5: Processing the loan takes forever.
How long it takes the SBA to process your loan depends on you and your banker. If you find a certified lender—someone the SBA has an agreement with to handle most of its processing—you will get a response from the SBA three days after your lender submits the application.
If you are working with a bank that is not certified, you should receive a response within 10 business days from the day your banker submits a complete application to the SBA.
You and your banker must follow the instructions that come with the application. If your financial statements are not up to date, background information is incomplete, and every question has not been answered as instructed, delays are inevitable. The SBA, like your banker, wants to know that you will use the money in a way that will result in your ability to repay the loan as agreed.
You’ll find that most bankers are willing to participate in SBA loan programs. Chambers of Commerce and small business associations support the programs across the country because they produce the type of long term financing that entrepreneurs often find difficult to obtain.