SBA Loans For Businesses, The Basics

SBA loans are one of the most popular commercial real estate loans in the nation, and for good reason.  They boast flexible underwriting, high leverage and the ability to roll real estate debt, equipment, debt consolidation as well as working capital debt into one loan.  They have been created specifically for the needs of small business owners.

Many people are under the impression that the SBA funds loans, actually banks and lenders fund the loans and the SBA guarantees the debt repayment to the lenders.  I.e. if the borrower defaults on the loan, the SBA will step in and pay the bank back for any lost capital.  Because the banks get this guarantee from the government, they are that much more willing to lend and to do more risky loans.

Again, banks actually lend the capital, therefore many of the underwriting restrictions are set by the bank, not the SBA.  In fact, most SBA business loans that are declined, are declined by the funding bank not the Small Business Administration guidelines.

One of the major benefits to the SBA business loan programs are the high level of financing offered.  For example, 90% on purchases and 85% on refinances.  Conventional commercial financing in contrast is capped at 60-65% loan to value.  This can be a huge difference for a small business owner that needs to keep as much cash on hands as possible.  

SBA Business Loan Guidelines

As far as the SBA guidelines are concerned, the borrower must fit their restrictions as well.  Repayment ability from the cash flow of the business is vital.  Typically borrowers will have to show enough net income off of their last 2 years of tax returns to cover the proposed loans payments.  So again, cash flow is critical. 

In addition, good character, meaning decent credit scores, and management experience are important.  The collateral’s condition and value are also important and reviewed.  The borrowers “equity contribution” in the case of purchases is also considered.  The SBA also requires a personal guarantee from all borrowers with a 20% or more ownership.

The SBA guidelines have been written to be as broad as possible, though a few more restrictions include that the business must be for-profit, and not already have the internal resources to do the loan, are required to get the requested financing.  

A major misconception with borrowers is that all SBA business loans and lenders are basically the same, i.e. “if we get declined from one source, we must not be eligible.”  This is not the case, as mentioned above most loans get declined from banks, not the SBA.  So it pays to keep looking.