In 2002, Dr. Donna Woo needed a $200,000 loan to open her first chiropractic office. She had just graduated and was eager to start her new practice. All her years of school were finally about to pay off. But she was missing one important thing: startup capital. She canvassed her family members and one of them told her about the Small Business Administration and its loan programs. She decided to give it a shot.
Thankfully, Woo is a go-getter by nature, because landing an SBA loan turned into one of the toughest full-time jobs she has ever experienced. It took three long months. She put together detailed spreadsheets showing her projected income month by month and year by year over a five-year period. She wrote a thick business plan laying out the past, present, and future of the overall chiropractic market. And she filled out reams of SBA forms, often two or three times each. This is what the SBA required before it would guarantee Woo’s loan.
The effort required to complete the process was surprising, especially considering that many banks at that time were handing out much bigger loans and asking for little more from customers than a signature and a tax return. (The SBA doesn’t make loans itself. It partners with banks that are hesitant to make small business loans on their own. The SBA assures these lenders that the government will reimburse a portion of their loss if a business defaults on its loan.)
Woo, who operates the Dr. Donna W. Woo Chiropractic & Wellness Center in Las Vegas, admits that applying for the SBA loan was a good learning experience. It required her to think about her company’s fundamentals and how she would succeed. But it’s not something she’d ever go through again. “I have patients to deal with now and simply don’t have that kind of time,” she says. “It was much too demanding.”
Woo is not alone. The media may be full of reports on the vegetative state of loans to small businesses and the urgent need for Washington and the SBA to do something to revive them, but the real story is that most small businesses don’t want an SBA loan.
“The SBA has this reputation that it takes an arm and leg to get approved,” says John W. Collins, author of The Finance Formula and president of business finance firm UnCap, which provides business credit training and consulting to new small business owners. “For many business owners, jumping through all those hoops just isn’t worth the effort.”
A recent report by Discover Small Business Watch, a collaboration between Discover Card and independent research firm Rasmussen Reports, surveyed business owners with five or fewer employees and discovered that 91 percent of owners said they had never applied for an SBA loan and 61 percent of owners said they’d be “not very likely” or “not at all likely” to apply for an SBA loan.
Unfortunately, this reluctance isn’t only about arduous paperwork. Jim Wilson, partner at Wilson Stoyanoff, has closed numerous SBA loans for clients of his law firm, which specializes in small business legal issues. He says another drawback to SBA loans is the extra fees. “These bring the cost of doing the loan way up. The fees are usually added on to the loan, so there is no additional out-of-pocket expense that’s paid when the loan is made, but they’re paid over the long term.
Don Woodward, president of Adventure Zone Family Fun Center in Geneva-on-the-Lake, Ohio, had to work with the SBA because his bank wouldn’t make the loan he needed without an SBA guarantee. He says he wouldn’t use the agency in the future. He cites many disadvantages to his SBA loan, including higher interest rates, longer processing times, and “incredible loan fees, documentation fees, and legal fees.” His loan amount was $125,000 but he had to pay $3,500 in legal fees alone to the attorney contracted by the SBA.
For business owners with no other options, however, an SBA loan can still be a lifeline, especially in today’s viselike credit market. Charles E. McCabe, chief executive officer of Peoples Income Tax in Richmond, Virginia, says the SBA still plays a critical role in helping entrepreneurs create successful enterprises. That was the case with his company, which provides tax preparation and other business services. “We obtained an SBA-guaranteed bank loan last June and this helped us continue growing our business,” he says. “We wouldn’t have qualified for a conventional bank loan.”
McCabe agrees that the paperwork can be a hassle, but his advice is to find a banker who specializes in SBA-backed loans. This can eliminate any errors in the application and greatly expedite the approval process.
Jennifer Vickery, founder of Full Circle PR in Tampa, Florida, understands how frustrating it can be to work with a banker who lacks experience with the SBA. Her banker had her complete the SBA paperwork, then called her back a month later to say she’d have to do it over again because she used blue ink, which is not allowed. Three months after starting the process, Vickery thought she was finally going to be approved for her $35,000 loan.
Then her banker called again, this time to say that the SBA wanted to see proof of $50,000 in property insurance. “This was particularly mystifying because we rent our space and so don’t pay property insurance,” says Vickery. She managed to resolve that detail and finally did receive her loan, four months after she started the process.
“I was so exhausted from the experience,” she says. “I thought about just dropping the whole thing many times, but I figured I had come this far already. I can’t believe what I had to go through for a loan that was only $35,000.”
Collins of UnCap says the SBA is getting the message and rolling out “express loans” that require less documentation and can be approved in as little as 36 hours. But he has yet to see anyone get such a loan and questions how seriously they’re being promoted.
Until something fundamental changes, business owners like Dr. Donna Woo will continue to steer clear of the SBA. She recently was looking for a $500,000 loan to purchase and remodel a new office space. “I didn’t even consider the SBA,” she says. “I just didn’t have the energy to go through that again.”