If I were to ever borrow money from a bank under one of the SBA programs (which, by the way, is unlikely after all the carnage I’ve seen), I would never borrow from a community bank or a credit union.
In many cases, obtaining a loan through your local community bank or credit union may be easier than going through one of the major national banks. Decisions tend to be made locally (as opposed to being approved in an underwriting center hundreds or thousands of mile from you), and because of that, these lenders tend to be able to make faster decisions, and make exceptions that the larger lenders won’t make because their underwriters are not empowered to do so.
So if they are easier to get a loan from, why am I saying that I’d never take an SBA loan from them? Here’s why: When the you-know-what hits the fan and you can’t afford your loan payment, community banks and credit unions tend to be quite rigid and unwilling to discuss an SBA Offer In Compromise. While this is by no means an absolute, it has been my experience that larger banks are more willing to consider settlements.
After recently having a very reasonable offer turned down by a community bank, I began thinking about similar experiences I’ve had in the past with other community banks around the country. It became clear that when you are attempting to work out and SBA Offer In Compromise, you almost always want to be dealing with a larger institution.
So, why are community banks so unwilling to compromise? Here’s what I think:
– The bank doesn’t do a lot of SBA lending, and is unaware that the Offer In Compromise process even exists. Since they’ve never been through the process before, it’s much easier to say no to an offer than to take the time to muddle through the process.
– The bank is afraid to lose their SBA guarantee. I’ve have a good number of smaller lenders sue borrowers, and claim that the SBA requires them to do it. This is NOT TRUE. While the SBA does require the banks to take steps to achieve the best possible recovery, there is nothing in the SBA SOPs (Standard Operating Procedures) that requires litigation in order for the SBA to reimburse a bank on a defaulted loan.