Several myths surround Small Business Administration (SBA) lending, including the idea that the SBA makes loans directly, that they're only for startups, or that they're a complicated, lengthy process. In reality, the SBA guarantees loans from other lenders, they serve various business needs, and the process is becoming more efficient. Additionally, SBA loans can be a valuable resource for established businesses looking to expand or improve their operations.
1. Myth: There are a lot of ongoing SBA reporting requirements that are exhaustive and intrusive.
Reality: There is very little reporting required from the lender or the borrower once the loan is funded. WBD, on behalf of the SBA, will request annual borrower tax returns, a borrower jobs count two years after funding, and annually we will ask the Third-Party Lender to report on the status of their loan. Other than that, you will not hear much from the SBA or WBD.
Reality - the Third-Party Lender will typically be requiring far more information than your friends who administer your borrower’s 504 loan.
2. Myth: The application process is overwhelming.
Reality: Perhaps there was a time when this was true – today it is not. As the 504 program has evolved and improved over the past 40+ years, so too have the SBA and WBD processes. As one of the largest originators of 504 loans we know what we are doing and we do it well. WBD continually hones our streamlined process, and the 504 specific documents needed at application are minimal and brief. Reality -project details and financial documentation needed for an SBA loan is much like a non-SBA conventional loan.
3. Myth: Approval is a crap shoot, takes forever, and, if approved, will have some egregious surprise requirement like a mortgage on your home or worse.
Reality: Nationally, the SBA approval rate for 504 loan applications is over 95% - WBD’s SBA approval rate – even higher. As for approval times – currently approvals are received in 5 or fewer days. Sometimes we receive same-day approval. As for egregious surprises – just not true. The collateral in a 504 project is limited to the project assets financed. No second mortgages on homes or other personal property.
4. Myth: Only really small businesses qualify for an SBA loan.
Reality: While the SBA does have qualification parameters, the size limits are generous – businesses must have a tangible net worth of less than $20 million and two-year average net income of less than $6.5MM – not exactly the profile of a really small business. The SBA works equally well for small and not so small businesses.
5. Myth: SBA loans are for start-ups or for struggling businesses.
Reality: While SBA loans are used for start-ups and occasionally for businesses that may be facing headwinds, they make sense for businesses in all stages. The favorable terms of the 504 program, like lower equity contribution, below market fixed rates for up to 25 years, and a low LTV / first lien collateral position for the Third-Party Lender, make for a debt structure that has risk mitigants for all parties at all stages.
If you have a customer that would benefit from a 504 structure but you sense they may have some preconceived notions about the program, please contact me to see how we can work together for a game plan that will help your customer be comfortable with the 504 loan.
