I see many comments from Small Business owners who are frustrated by the fact that their loan application to the US Small Business Administration (“SBA”) was just declined. However, there is a dirty little secret that your Bank doesn’t want you to know; the SBA most likely never saw your application. You are probably saying, “How could that be?”
The most popular SBA program is the 7a loan guarantee program. This program is actually not a program for small businesses but rather a program whereby Banks can secure a government guarantee that they will not lose money on up to 75% of the Bank’s small business loan. You see this is a credit enhancement program, designed to create an incentive for Banks to make more small business loans.
HERE IS HOW IT WORKS:
The SBA establishes the minimum credit criteria for a small business loan that the SBA guarantee against loss. However, there is no requirement that the Bank approve all eligible transactions. In fact, Banks use their individual underwriting standards to screen out undesirable loan requests. When a bank approves an application it then submits an application of its own to the SBA requesting the guarantee. Only then does the SBA actually get to see anything about your project.
Some of you are probably wondering why an applicant simply can’t get approved for the SBA guarantee first and then shop their project to potential lenders? That would seem logical, but as stated earlier, the SBA 7a program is not really a program for small business it is a program for Banks. The truth about SBA loans is that the Small Business Administration is not a direct lender, but rather an insurance company securing the financial stability of participating Banks.
Now, should you find yourself in a situation, where some Banker tries to explain how they would really like to approve your loan but for that unfortunate SBA decline, ask them to show you the actual SBA government agency decline. Certainly, there will be a few, but by and large the most frequent true answer will be that you were declined by the Bank and the SBA never saw your application.
There is hope! We at NonBankLender pride ourselves on being different; hence the name. While many of our team members cut our teeth working at Banks and delivering that line about SBA having declined your application, we are now working to bring straight talk to the small business community. Let us help you stop being deceived, give us a call today for a frank assessment and further to develop a realistic financing plan.