Common SBA loan myths debunked: What business owners should know

Small Business Administration (SBA) loans are a valuable resource for small businesses seeking funding. Supported by the government, it reduces risk and enables easier access to capital, allowing financial institutions to provide business loans with more favorable terms. However, myths and misconceptions surrounding SBA loans deter business owners from pursuing this beneficial program.

Understanding SBA loans

SBA loans are government-backed financing options designed to support small businesses. The U.S. Small Business Administration does not lend money directly; instead, it guarantees to the lender a portion of the loan much like an insurance policy, reducing the risk for lenders and making it easier for small businesses to secure funding. SBA loans encourage financial institutions to lend to businesses they may not normally work with otherwise by guaranteeing a majority of the loan amount to the lender should the borrower default on the loan.

Various types of SBA loans cater to different business needs: the 7(a) loan program, the CDC/504 loan for real estate and equipment, and micro-loans for smaller funding amounts.

The 7(a) loan program is SBA’s primary loan program. It provides financial assistance for various business needs, including working capital, equipment purchases, business acquisitions, and partner buyouts.

Each SBA loan program has specific eligibility requirements, terms, and conditions. Small business owners must carefully evaluate their needs to determine the best loan option for their unique situation.

Common myths about SBA lending

Myth #1: SBA loans take too long

It is a common misconception that SBA loans take too long because of a lengthy and complicated approval process. While SBA loans do require detailed documentation, it is no more than a Fannie Mae or Freddie Mac mortgage. Recent improvements significantly streamlined the process.

The time it takes to process an SBA loan can vary based on several factors, including the borrower’s time to complete the application, the lender’s efficiency and the completeness of the application. The SBA’s Preferred Lender Program (PLP) allows experienced lenders to expedite the approval process, often completing it within a few weeks. Some lenders have even implemented new technology and software upgrades to further speed up the application and approval process.

Myth #2: SBA loans require perfect credit

Many business owners assume that only those with perfect or near perfect credit can qualify for an SBA loan. However, the SBA does not require a flawless credit history. Instead, the SBA considers various factors when assessing creditworthiness, including the business’s financial health, cash flow, and management experience.

While a strong credit score can improve your chances, SBA lenders are willing to work with businesses that may have had past credit issues. To improve eligibility, business owners can focus on paying bills on time, reducing existing debt, and addressing any inaccuracies on their credit reports.

Myth #3: SBA loans have high interest rates

Another common misconception: SBA loans carry high interest rates. It is quite the opposite. These loans often feature the same or lower interest rates compared to traditional operating business loans. The SBA sets maximum interest rates lenders can charge, ensuring rates remain competitive and affordable.

SBA loans typically have interest rates tied to the prime rate plus a margin. Besides the competitive interest rates, these loans offer other financial benefits, such as longer repayment terms and lower down payments.

Myth #4: SBA loans are only for certain types of businesses

Contrary to this myth, SBA loans are available to a wide range of businesses across various industries. From retail and manufacturing to service-based businesses and franchises, many sectors can benefit from SBA financing.

Examples of businesses that have successfully obtained SBA loans include restaurants, healthcare practices, tech startups, and construction companies. This diversity highlights the inclusivity of SBA lending programs, making them accessible to many different types of businesses.

Myth #5: The application process is too complicated

While the SBA loan application process is comprehensive, it is not impossible. Numerous resources and support systems are available to help applicants navigate the process. The SBA provides detailed guidelines and resources, and many lenders have dedicated teams to assist with the application.

Credit union service organizations (CUSOs) play a crucial role in supporting businesses through the SBA loan application process. These organizations offer their expertise, help prepare necessary financial statements, and ensure compliance with SBA requirements, making the application process more manageable.

The role of credit union service organizations

CUSOs like MBFS are entities created by credit unions to provide specialized services to their members. They assist businesses by offering guidance throughout the loan application process, helping to prepare financial documents, and ensuring all SBA requirements are met. Working with a CUSO offers several advantages, including personalized support, faster processing times, and higher approval rates due to their expertise and close relationship with lenders.

Debunking these myths highlights the advantages of SBA loans. With streamlined processes, reasonable credit requirements, competitive interest rates, and support for a wide range of industries, SBA loans are an excellent resource for small businesses seeking growth and stability. Business owners are encouraged to explore SBA lending options, leveraging the support of CUSOs to navigate the application process effectively.

Jeff Lyons

Jeff Lyons

Prior to arriving at Member Business Financial Services in 2018, Jeffrey was the VP of member business lending for Financial Resources Federal Credit Union in Bridgewater, NJ where he worked ... Web: Details