Small Business Administration Loans – Understanding the Process Part 1
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The Small Business Administration (SBA) has many worthwhile programs that can benefit small business owners. Among them are several types of loan programs that provide businesses with loans to purchase assets, whether real estate, equipment, the assets of an existing business, and inventory.
Over the next few posts I am going to discuss the various SBA loan programs and provide an unbiased view of their strengths and weaknesses. I am also going to provide my opinion on the best way to seek out an SBA lender, and lastly I am going to try to provide my experience with some of the features of SBA loans that I feel need to be carefully considered by a prospective borrower.
To start out, the SBA doesn’t normally make loans directly. There are some exceptions, such as in the case of disaster loans made to businesses after a hurricane, flood, or other widespread disaster in a community. In cases other than disaster loans, the SBA provides a loan guarantee to a bank or non-bank lender who is approved by the SBA loans to originate and / or service the loan.
The SBA has two main categories of lender programs, Preferred Lender Program (PLP) and Certified Lender Program (CLP). The PLP lender accepts a larger share of the loan risk than a CLP lender, and originates substantially more SBA loans than a CLP lender. Why is this important to you? Well, because the SBA lending rules and guidelines are very complex and it takes a sharp loan officer to be able to have a good ratio of completed SBA loans to rejections. One strategy for success when pursuing an SBA loan is finding an SBA loan officer who is very successful in getting SBA loans approved in a bank that makes many SBA loans.
There is another reason why a borrower should seek a PLP lender instead of a CLP lender. Approval for either is a two step process. First the credit must be approved, and secondly, the eligibility of the borrower must be approved. In both PLP and CLP loans, eligibility is determined by the SBA, but in the case of credit approval, only PLP lenders are able to make their own autonomous credit decisions. CLP lenders must first do an internal approval then submit the loan package to the SBA for further credit approval. In nearly all cases I have seen PLP lenders complete the entire transaction much faster than CLP lenders.
When looking at the SBA loan statistics by bank, don’t be fooled by the Mega Banks who claims to have made the most SBA loans in a given year. Several of the largest US banks make such claims. However, upon closer examination, one might find that they made a huge number of very small micro-loans under the SBA micro lending program. If your business needs more than $50,000 in loans, look for a community bank in your area that is a strong SBA lender. Also consider non-bank SBA lenders. There are a dozen or so throughout the U.S. One example is Small Business Loan Source (SBLS). SBLS is a non-bank SBA lender. In fact, SBA loans are all they do. There are several others including Merrill Lynch and CIT Financial.
In my next post I will specifically discuss SBA micro loans.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
or follow him on Twitter: SMBfinance
EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his podcast show.
