The Small Business Administration (SBA) offers lending programs to assist visionary entrepreneurs with starting, managing, and growing their small businesses. However, these lending options are often misunderstood as last resort loan funding options. Much of this misperception is centered around borrower experiences with banks who are not preferred SBA lenders or who do not have specific lending expertise or knowledge of the complexities of your small business.

At Firstrust Bank, we frequently get questions of this nature from our customers. We’ve compiled some of the frequent “myths” associated with SBA lending to debunk the common misconceptions.‍

Myth #1: SBA loans are not borrower friendly‍

On the contrary, SBA loans were created to be borrower friendly. Compared to conventional loans, they have longer repayment terms and lower down payment options. In some cases, the SBA interest rates charged are more favorable than a conventional, non-SBA loan.‍

Myth #2: The lending process is slow and inefficient‍

Generally, the type of financial information required under the SBA is the same information required by conventional non-SBA banking options. A lender who is  part of the SBA’s Preferred Lender Program (PLP) can lend a helping hand when considering an SBA loan.  A PLP lender will determine eligibility, properly structure the loan and collect appropriate documents to keep things moving smoothly. PLP allows banks to approve the loan without waiting for the SBA’s approval.‍

Myth #3: SBA helps businesses with weak cash flow‍

The SBA takes projected cash flow into consideration, but historical cash flow takes a higher priority (Exception: financing for business start-ups).‍

Myth #4: Successful businesses don’t use SBA‍

This is one of the most unfortunate myths because it gets in the way of great opportunities for small businesses. While SBA loans can help overcome certain business challenges, many business owners obtain SBA loans to help continue growth and expansion. These loans can also offer more flexibility than conventional financing.‍

Myth #5: SBA loans require extensive collateral‍

This is a very common misconception when it comes to SBA lending. SBA guidelines require lenders to take certain available collateral, such as junior liens on real estate which has available equity. The program also specifically states that a borrower who lacks such collateral may be approved based on strengths that shows the borrower’s ability to repay the debt.  One of the primary reasons lenders use the SBA-guaranteed program is for those small business applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults.‍

Myth #6: SBA loans are only for bad credit‍

It has been a long-standing misconception that SBA loans are for businesses with credit challenges, financial struggles and those who are generally underperforming. This myth couldn’t be further from the truth. In fact, loans are still underwritten and decisioned based off the Five Cs of credit – character, capacity, capital, collateral, and conditions.

SBA loans help community banks better serve the local business community. Don’t let misperceptions stand in the way of the many great opportunities that exist.