With so much misinformation out there, looking for a small business loan can be an overwhelming process

for someone who has never encountered the world of SBA lending. In this guide, you will learn the basic

principles of small business lending, the benefits of using a small business loan, and the truth about the

different aspects of SBA loans.

The Basics of an SBA Loan Government-backed SBA financing is offered to small businesses in order to make small business financing

available with lower down payments, longer repayment terms, and easier qualifying criteria than

conventional bank loans. Small businesses can use SBA financing to buy a building for their business, to

construct a new building, to remodel the facility, to buy new equipment, to acquire a business, to buy out a

partner, to obtain working capital for expansion, or to refinance existing debt for better repayment terms.

Why should you use an SBA loan to finance your small business?

Here are some of the reasons a small business might benefit from paying the SBA guaranty fee and

obtaining financing through the SBA 7(a) government-backed small business loan program:

1. SBA financing provides a long term repayment program.Most real estate loans are repaid over 25-30 years, and non-real estate loans are repaid over 10 years.

For small business real estate debt, conventional bank financing typically offers a 10-20 year repayment

amortization; however, a balloon feature requires refinancing in 1, 3, or 5 years, along with additional

closing costs and origination fees. SBA loans, therefore, do not have renewal risk like most conventional

bank loans.

A small business owner may have a hard time predicting his likelihood of approval for a loan renewal,

or the economy might be affecting his business performance at that time, and he does not know if the

bank management will be the same or look at his loan in the same way at the time of renewal. Long term

financing can be a strong positive benefit of SBA financing to eliminate renewal risk and to keep payments

as low as possible due to the longer repayment amortization.

2. SBA financing requires lower down payments, and it preserves cash for working capital in the business.Working capital financing can sometimes be the most expensive form of bank financing. If a small business

can preserve working capital for operations, by putting a lower down payment on their new building, this

can be a significant borrowing cost saving, or it might merely make working capital available that would

otherwise be difficult to qualify to borrow.

3. In a time of economic uncertainty, or in situations of uncertainty such as business startup, small businesses have problems qualifying for conventional bank financing.The partial SBA government guaranty on a small business loan request is often just the right amount of

incentive to cause a lender to approve a loan request that they could not otherwise get comfortable with.

In the final analysis, small businesses are providing the fuel for economic stimulus, and SBA loans are

closing costs and origination fees. SBA loans, therefore, do not have renewal risk like most conventional

providing financing terms which could not otherwise be offered through conventional means. A cost/

benefit analysis will often make the SBA guaranty fee look like a small price to pay for accommodating the

small business’ need for funding a project which will enhance the small business return more than the cost

associated with it.

Fact or Fiction? Common Beliefs aboutSBA Loans

1. The process of receiving an SBA loan takes a long time and requires a lot of paperwork.FICTION

Do you know what a lender requires to process a conventional (non SBA) loan request? If so, the

information is virtually the same for an SBA loan request, so it generally does not take any longer to

process the loan application.

2. A business loan request generally requires more time and paperwork than a consumer loan request.FACT

Relatively speaking, SBA loan processing times should not be more burdensome than any other type of

commercial loan request, because the information required for underwriting is essentially the same.

Some lenders, however, are not experienced with SBA lending, and they have not earned the PLP

designation. In those situations, the small business borrower may be their guinea pig for a new loan

program.

3. All SBA loans are processed by the U.S. Small Business Administration. FICTION

Today, the SBA direct loan program is limited primarily to disaster relief. Most SBA loans for small

businesses are now processed by banks, credit unions, and licensed non-bank lenders through an indirect

loan program called the SBA 7(a) loan program. SBA 7(a) loan proceeds are available in any amount up to

$5 million for any eligible small business and for any legitimate business purpose. Instead of going directly

to the U.S. Small Business Administration to borrow government funds, the small business now goes to a

participating lender who will loan their own funds using SBA forms and guidelines.

The participating lender will receive a partial government guaranty for the loan, and this allows the lender

to approve terms with lower down payment requirements, longer repayment terms, and more relaxed

underwriting guidelines than a non-guaranteed or conventional loan. If the lender has been qualified by

the SBA under the Preferred Lender Program (PLP), that lender now has the authority to approve loans

on behalf of the SBA. Loan requests, which may have languished for six months under the old direct SBA

government loan programs, can now be approved in as little time as two weeks.

4. An SBA loan requires that the borrower and the lender both have a significant level of investment in the business.

FACT

By loaning you funds for your small business, your lender will have significant investment in your

business. Consequently, each lender will find comfort in granting the loan based upon the level of

investment made by the borrower. But how will the lender determine your level of investment? Here are

some examples of types of investments that the small business lender will like to see:

Dollar InvestmentThe lender will compute a debt-to-equity ratio, and compare it to industry averages and other financial

benchmarks, to determine if the borrower has adequate skin in the game. Part of that investment includes

a measure of the dollars invested in the business by the owner compared to dollars he has received from

loans.

Collateral InvestmentEven though the lender will look at the borrower’s dollar investment in the business as a measure of

contributed equity, the lender will also look at the borrower’s assets offered as collateral for the loan. He

may also accept other assets outside the business, pledged as additional collateral, in lieu of more cash

contribution.

Seller InvestmentNot all small business lenders will accept seller investment to help a buyer of small business assets to

qualify for financing. The Small Business Administration rules, however, allow the SBA lender to accept

seller standby financing for a portion of the buyer’s qualifying equity. There is a catch. The seller debt

needs to “act like” equity. That means the seller will sign an SBA Standby Agreement agreeing to delay

requiring payments until the SBA loan is satisfied first. It also means the SBA lender will have first lien

rights on the business assets sold by the selling note holder who is permitted to file a second lien on these

assets. The standby creditor earns and accrues interest on his loan, but he receives no cash payment until

the SBA loan is paid off first.

In this basic introduction to SBA lending, you have learned:

. Why a small business loan can be the right choice for your venture. The truth about some common beliefs regarding SBA loans

Now you’re prepared to start looking for the right lending institution for your small business loan. Happy

hunting! May you find the small business loan terms that best match the needs of your business!

For more information about SBA loans, please contact Bruce Hurta:

About Bruce HurtaBruce Hurta has extensive experience in Small Business Lending. He served in a number of

commercial lending and banking capacities in his career including President of a Houston-area

community bank for 6 years. Bruce also established and managed the Houston office for a non-bank

small business lending company where he specialized in SBA lending for 14 years.

Bruce spent 4 years as a bank examiner for the Texas Banking Department, 7 years in executive

management at two community banks, and 18 years as a specialty SBA Lender. He is active in the

commercial realtor and business brokerage communities, along with various business and industry

organizations. Bruce is the 2013 president of the Houston Association of Government Guaranteed

Lenders.

In July 2009, he joined Members Choice Credit Union as the Business Lending Manager to lead their

new SBA Lending Program.

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