How SBA Financing Works

How does SBA financing work?  First of all, it is very similar to regular commercial bank financing.  In fact, one of the biggest misperceptions out there is that the SBA finances transactions themselves.  This is not the case.  Loans are financed by banks and the SBA guarantees the bank in case the borrower defaults. 

So essentially, the SBA is just making a promise that they will reimburse the bank if the borrower fails.  It’s basically an insurance program for the bank.  Because of this guarantee, banks will make loans to borrowers that they would not consider, by a long shot, if they did not have the guarantee.  Aggressive features of SBA finance include 90% financing… (Most banks won’t go beyond 60% now a days), considering goodwill of businesses as collateral, financing start ups, etc. 

Because the SBA basically just guarantees the bank, borrower should remember that being declined by one bank does not mean that there transaction isn’t doable via the SBA programs.  Within SBA financing, there is a wide degree of what one bank to another will consider credit worthy.  It is also critical to remember that banks have their own problems.  You may have a solid loan request and the bank may decline it because they have exceeded their capital reserve limits or have low liquidity, etc. 

If you are declined it is best to find out exactly why, so that you can be better prepared to deal with it with the next bank, broker or lender. 

How To Apply For SBA Financing

In general you should first do phone interviews, than send in required documentations.  On the phone interview you want to discuss the overall transaction, including its strengths and weaknesses.  If there are major issues with the request you should mention them, in a positive light, and see if they might have a solution to it.  Don’t bother trying to leave anything hidden, as the underwriters will discover it later. 

Also, try to determine their level of activity, i.e. are they really funding loans?  Many banks are still taking loan requests yet aren’t funding loans.  Why?  There's a variety of reasons, like lack of communication from upper management to loan officers, denial, trying to not lose face in the market place, etc.  But it’s your money and time that is on the line, so you need to figure this out.  One way to do this is get third party referrals from other business owners, your CPA’s, attorney or of course seasoned commercial mortgage brokers. 

Assuming you think the bank is active, and that they like your loan request you will need to get to work and provide the necessary paper work.  This is extensive and time consuming, though there is no way around it.  You fill out the forms and provide the needed documentation or you go nowhere. 

After the bank receives the package from you they normally will issue you a term sheet within 5 days or so which spells out the proposed loan.  At this point your deep into the process and need to make a decision to go with that bank or not.

SBA financing is still viable… they continue to close as the rest of the commercial mortgage market falls apart.  Business owners that need to buy commercial real estate or refinance their property should give SBA financing serious consideration.