The Pitfalls of SBA Guaranteed Financing

This might sound like an odd title for an article written by a person who just left a stable paycheck to start an SBA focused loan brokerage. That’s me! Ha, ha!

But if I’m being honest, which is my goal, I have to admit that SBA guaranteed financing is not for everyone.

Here are four things you need to know before applying for an SBA guaranteed loan.

1. Lenders are required by the SBA to collateralize loans to the maximum amount possible, up to the loan amount, provided collateral is available. In the case of a collateral shortfall, most frequently on working capital loans, it’s likely the SBA will put a lien on the applicants home bridging the gap between the loan amount and the collateral shortfall. I always discuss this matter during my initial converation with prospective applicants. I personally would want to know this fact up front, so I extend that same courtesy to my clients.
2. Rates are relatively high for loans not secured by real estate. (Rates for loans secured by real estate
   are at all time lows) Many people I speak with are shocked during our initial conversation to hear their rate will be between 6% – 9%. Let’s face it, everyone expects residential mortgage rates which are at all time lows between 3% – 4%. Borrowers must realize that SBA working capital term loans are primarily for businesses and owners who are not able to obtain a similar loan from a conventional bank which means there is a higher risk of default. Simply put, higher risk means higher rates.
3. Skeletons in the closet will be brought to light. The SBA Form 1919 asks whether the applicant has filed for bankruptcy, has previously defaulted on federally guaranteed debt, are in litigation at the time of the application, are presently under indictment, have been arrested in the last six months for any criminal offense or have EVER been convicted of a crime other than a minor vehicle violation. And don’t lie on the form, that is a recipe for disaster because the SBA will find out. Even worse the applicant might face prosecution for lying to the federal government.
4. Processing times to successfully complete an SBA application from inception to funding can take quite a bit longer than conventional loans. Remember, the SBA is a federal government agency which is subject to the same bureaucratic delays as other federal agencies. Now, this is not always the case and we can certainly help speed up the process.

The SBA has helped thousands of business owners grow and start companies. Often an SBA guaranteed loan is the right loan. However, for the reasons I shared above, it’s not for everyone.

But don’t worry, if you’re thinking about applying for an SBA guaranteed loan we can help you navigate these uncharted waters with certainty.

Give us a call at (858) 762-2774 to ask your questions and make sure to subscribe to our SBA FM Podcast which is geared to help business owners and entrepreneurs bone up on their knowledge of SBA guaranteed financing before applying.