How Much Guarantee Does the SBA Really Provides?

US’ SBA (Small Business Administration) does not lend capital directly to small business owners, but provides a guarantee for loans made by banks. If you are SBA approved, the SBA guarantees that a certain percentage (%) of your loan will be repaid, thus eliminating risk for the lender. However, despite applying for government secured loans, small business owners still have a hard time access capital. Why? How much of a guarantee can SBA provide your business?

If you are a small business owner who qualifies for an SBA secured loan, you’d probably expect banks to be lining up to give you capital. However, the reality is that you might still have a hard time borrowing money. SBA guarantee or not, you will need first to prove to your bank you satisfy the 5 ‘C’s of credit prior to any approval.

It’s a common misconception to think that a government guarantee facilitates access to credit. Unfortunately, SBA approved borrowers cannot count on the SBA guarantee towards their collateral. Most businesses wonder why banks ask them for additional guarantees if most of the loan is secured by SBA.  ‘If a bank is lending me $1 million of which $900,000 is secured by SBA…why do they also need my building?’ The answer is: because if the loan defaults, the bank would rather take the building then turn to SBA.

It’s difficult for lenders to collect on SBA loans, which could take up the 5 year negotiations. As a result, banks lend only to businesses they can underwrite themselves. No matter how big or small the loan is, a lender won’t make a decision based on government guarantee.

If an SBA guarantee has no value as collateral what is the purpose of SBA? What the SBA insurance really does for banks is that it stretches their credit policies. Typically, a bank will lend under a 5 year balloon. Having SBA approval allows banks to lend for 15-20 years under fixed term rates. Lenders can now expand their loan products and provide borrowers with longer terms.

The other difficulty you might encounter when applying for capital, besides providing collateral, is the ability of banks to lend money to your business. A recent example includes restaurant and hotel owners. Following FDIC (Federal Deposit Insurance Corporation) regulations, banks have to follow strict concentration rules for their portfolios. If a bank has reached the maximum number of hotels and restaurants on its books, it won’t matter that you want to borrow $100,000 secured by $500,000 CD (certificate of deposit). The answer will be ‘no’ because of concentration policy.

So what options do you have left if you have no real estate to secure your loan or have been otherwise rejected by a bank? If you cannot get credit anywhere else, look for community lending organizations like EDIF(Economic Development Investment Fund). EDIF is a nonprofit organization and a lender of last resort. The organization provides low rate loans through government stimulus grants or through donations of private individuals and businesses.