SBA financing sources


Despite the problems with the Stimulus Package, SBA loans are likely still the best source of financing in the nation for your small business. The reason? Compared to the other source of financing available to small businesses, which really boils down to conventional financing (meaning that banks lend their own money and hold onto the loan in their portfolio), SBA loans remain the most reliable in terms of actually closing...

The underwriting standards for conventional small business loans are substantially tougher than with SBA loans and banks are much more "nervous" to lend without the government backing. For example, 85% loan to value financing on SBA loans compared to 60% loan to value on conventional. Debt coverage ratio's as low as 1.2 on SBA, versus 1.4 for most conventional lenders. It goes on and on in terms of underwriting rules. The SBA underwriting guideline are by no means easy, but are more lenient than the other options out there.

There is another side of underwriting for banks that is more subjective and makes conventional lending more "fragile" for borrowers. At the end of the underwriting process, loan committees still have to make the "go, or no go" decision to fund the loan or walk. The risk for borrowers that their bank will cancel their loan request deep into the process, for subjective reasons, is substantially higher with conventional loans. It's their money and they are that more skittish about closing. Bottom line if you have the option to go either route, SBA or conventional, take a long hard look at SBA loans for this reason.

As far as above mentioned issues with the government created Stimulus Package, the issue has really boiled down to uncertainty for banks which than trickles down to borrowers in the form of banks not wanting to lend and or not wanting to lend aggressively. The main problem for banks has been that the Stimulus has been activated, expired, than re activated four times now. And currently it is not clear whether or not they will reissue the 90% guarantee or not. They have been put in a difficult position at no fault of their own.

Historically the Guarantee for banks has been set at 75% on the popular SBA 7a loan. With the Stimulus they pushed the guarantee to 90% creating an incentive for banks to do loans that they normally wouldn't consider.

So for borrowers that are proceeding with an SBA business loan request, it would be prudent to get them to agree to do the loan at 75% so that you prevent the chance of having the funding SBA lender pull out based on what the Government does or does not do.

Jeff Rauth is President of Commercial Finance Advisors, Inc. They close SBA and other commercial mortgages between $400,000 - $10,000,000 nationwide. Reach him at - SBA Lender

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