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SBA Loan Requirements – The Basics

So you’re looking for a loan, and your friend/colleague/advisor, says “hey, you should consider an SBA loan”.  If you’re like many small business owners, you’ve heard of the SBA, but have no idea what SBA loans are, who qualifies, where to get them, and how they work.

I can help with that.  Let’s do it in Q&A Format:

What does the SBA do?

In a nutshell, the SBA’s mission to help small business owners get loans from banks that they could not otherwise get.

How does the SBA help small businesses obtain loans?

Do you remember being a kid, and your mom gave you an extra cookie if you would just let your little brother play too?  The SBA is kinda like that.  When a bank doesn’t want to make a loan to a small business because it’s deemed too risky, the SBA offers to guarantee the loan (usually for 75%).  This means that if you take and SBA loan and don’t pay it back, the SBA will reimburse the bank for about 75% of the money they lost.

The SBA has a bunch of different programs, with 7a being the main type of loan that most business owners end up with.    In case you’ve never applied for a commercial loan, the best way to describe traditional banks is “conservative”.  They don’t take big risks.  Do loans go bad?  Sure, but most banks cover themselves by taking enough collateral to ensure that even if a business closes, they can sell your stuff and get their money back.  Outside of the SBA lending system, it’s very hard to get a business loan if you have insufficient operating history or collateral.  This is the vaccum that the SBA fills.  They get loans for borrowers who would not otherwise qualify for financing.

So if I default, the SBA just pays off 75% of my loan balance and I don’t have to pay it back? Awesome!

NO!  Let me say that again.  NO!  The SBA guarantee ONLY applies to the lender.  You, as the borrower/guarantor will still be responsible for repaying the loan balance even if the SBA reimburses the bank.  SBA loans are NOT free money!

Where can I get an SBA loan?

Good question.  It’s important to understand that the SBA is not a direct lender for most SBA loans (exception being a disaster loan, which I would never advise a client to take).  To obtain an SBA loan, you generally want to go to a preferred lender.  Preferred lenders have more autonomy when it comes to making SBA loans, and the process is generally a bit easier.  If a lender is not a preferred lender, they don’t have much experience, and that can make the process more difficult than it needs to be.  Most lenders state right on their website what their status is as an SBA lender.

Why would I want to take an SBA loan as compared to a regular bank loan?

In most cases, borrowers go for SBA loans not because they want to, but because they have to.  The most attractive feature of SBA loans is that they do not disqualify borrowers due to insufficient collateral.  This means that is you are buying a business and the sale price is well in excess of the value of the physical assets, it may still be possible to obtain an SBA loan to finance the purchase.  Most conventional lenders won’t touch that type of situation.

Are SBA loans more expensive than conventional loans?

In terms of the interest rate, that’s actually hard to answer because commercial loan rates vary wildly depending on the bank and the strength of the borrower.

However, you should be aware that the SBA charges a “guarantee fee” which is different that “points” or other fees charged by your lender.  The guarantee fee varies depending on how much you borrow.  There are a bunch of different scenarios, but here are the guarantee fees that will cover the vast majority of cases for 7a loans:

Loan Less Than $150K: 2% of the guaranteed portion*

Loans $150K to $700K: 3% of the guaranteed portion

Loans $700K to $5 Million: 3.5% of guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000

*Guaranteed portion means only the part the SBA is guaranteeing.  So if you borrow $100,000 and the SBA guarantees it 75%, you pay 2% of $75,000 as a guarantee fee.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Why should I use you to help me find the right SBA lender?

  1.  It costs you nothing (the lender pays me), and I give up to a $500 rebate if I earn a fee from your loan.
  2. I was a commercial loan underwriter for a number of years, including at the largest SBA 7a lender in the country.
  3. I have extensive experience settling SBA loans.  While nobody thinks about settling going in, choosing the right lender could mean the difference between a settlement and bankruptcy.
  4. I have 17 years of commercial lending experience, including both a small community bank, the biggest bank in the country, and the largest SBA 7a lender in the country.  (Translation: I’ve seen a lot of stuff).
  5. I’m not a high pressure sales guy.  I’m happy to speak with you and answer your questions.
  6. I won’t pass you along to someone else.  I personally handle all my clients.

Why should I pay for a commercial loan broker when I can walk into any bank and apply on my own?

That’s a really important question.  I’m a big believer in providing value to my clients, and it’s important to me that you understand exactly how I operate.

  1. You don’t pay me, the lender does.  – I will never ask you to pay me out of pocket.  Any lender that I have a relationship with pays me for referring a borrower to them.  This means that whether I refer you, or you find them on your own, the cost to you is the same.  If you aren’t paying anything additional, why not have an independent perspective?  When making big decisions, I’m a big believer in gathering as much information as I can.  At worst, you can always discard information that you deem irrelevant of not useful, and at best, you’ll learn something that is critically important to your decision.  Plus, I share the wealth and give you up $500 back once I get paid by the lender.

  2. When it comes applying for an SBA loan, not all lenders are created equal. – I’ve spend 7+ years advising clients who can’t afford to pay their loans.  I’ve had hundreds of clients and dealt with dozens of lenders (including dealing directly with the SBA itself), and if there is one thing I’ve learned, it’s that there IS a difference.  Some lenders “get it”, and are willing to make very reasonable decisions when it comes to settling debt.  I had a client settle $1 Million in debt for $50,000.  The bank didn’t settle out of the goodness of their hearts (no such thing in banking!), they did it because they understood their alternatives, and made a good business decision.  On the flip side, there are other SBA lenders who are absolutely incompetent.  Like most things in life, it’s hard to be good at something if you have little or no experience doing it.  I’ve have banks that initiate law suits are the first sign of trouble.  I’ve had other say things like “this is government debt, so it’s can be settled”.  These are banks that you don’t want to be involved with. 

Knowing which banks are willing to be reasonable, and which aren’t, can make all the difference in a worst case scenario.  As a career banker will lots of SBA workout and settlement experience, I know this better than anyone.  There are very few, if any, other SBA loan brokers out there who can claim this type of expertise.

Should I use a loan broker when applying for an SBA loan? 

Depending on which website you look at, you are going to get different answers and perspective.  As I’ve told my clients for years, you should always consider the motivation of the party who is giving you advice.  For example, for my workout clients, bankruptcy attorneys will frequently recommend that a borrower pursue bankruptcy, while a consultant like me will often recommend that borrowers try to settle outside of bankruptcy.  I’m not saying these rules are absolute, but all I’m advocating is that you consider the possibility that advice you get could be biased.  The same can be said regarding the whole idea of using a commercial loan broker for your SBA loan.

I was on a website for a company who had a whole section devoted to whether or not a person should use a commercial loan broker when considering an SBA loan.  At first it, was pretty factual.  Then as you moved down the page, they began to subtly express concerns about using a commercial loan broker.  Their conclusion was that if you are looking for an SBA lender, you should use their “platform” to find a lender instead of a broker.  I did a little more digging, and this site basically does the same thing as a broker.  They expose you to different lenders, and charge a fee for doing so.  The differentiating factor for them was that the process was all done online.  My immediate reaction was that this site was being a bit hypocritical.  They charge a fee (usually a % of the loan) for matching borrowers with lenders, but they don’t even offer live help.  So how is that better than a broker?

As someone who has made a living helping people with various SBA loan issues, I’ve found that with a financial decision this large, many people really want someone to guide them through it.  And I don’t blame them.  Using an SBA loan to finance the purchase of a business, consolidate debt, or buy a building is a really big deal that usually involves hundreds of thousands of dollars, or in cases millions.  SBA loans are different than any other loan type out there.  They have a variety of features, and about 300 pages of underwriting and servicing rules knowns as SOPs (Standard Operating Procedures).  With so much money on the line, it makes all the sense in the world to me to have an advisor who can walk you through the SBA loan origination process.

Of course, take my recommendation with a grain of salt!

Email Us at jason@jasontees.com
Call Us at (877)436-4533