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Understanding the Small Business Administration and SBA Lending

A detailed look at the inner-workings of this vital small business resource. While the SBA can be a vital resource for small business owners and entrepreneurs, many don’t understand its lending programs or place within the lending landscape.

While the Small Business Administration (SBA) can be a vital resource for small business owners and entrepreneurs, many don’t understand its lending programs or place within the lending landscape.

This SBA is a government agency that provides resources and support for small businesses and entrepreneurs. Most people associate the SBA with small business loans, but that isn’t necessarily the way the agency works. The SBA helps facilitate financing between SBA-approved lenders and small businesses and entrepreneurs. With the SBA acting as a guarantor of small business loans, the lenders that work with the SBA are encouraged to move forward on “riskier” loans. This relationship creates great opportunities for small business.

The SBA guarantees tens of billions of dollars of loans each year in order to support the country’s growing small business population, so programs like the 7(a) Loan Program and SBA Express Loans are a few that small business owners should consider when looking into financing.

The following is a good example of the misconceptions some have about the SBA:

  • I often encounter small business owners and entrepreneurs that don’t realize that the SBA is not the lender. A client recently called our office and voiced concern that his 680 FICO credit score disqualified him from receiving an SBA loan from a small, local bank. He took the rejection as finite and proceeded to look into other financing options. This client, like many others, failed to understand that the SBA is not the lender, and that each SBA lender is different.
  • With some loan counseling and education, this client came to realize that each SBA lender treats the agency’s lending programs differently because of the lender’s risk tolerance, experience, and comfort. Based on these factors, what is set in stone with one lender may not be representative of another. It’s very important for small business owners to remember this when seeking an SBA loan, so that they can compare lenders and evaluate their full range of financing options.

Just as consumers shop for the best rate on other services, like car insurance or dry cleaning, business owners should consider multiple SBA-approved lenders when looking into SBA loans. All lenders, depending on their experience with SBA loans and risk tolerance, will likely vary when it comes to loan terms. Some banks use SBA programs sporadically, while others use it quite often. Some banks have higher risk tolerances, while others are more conservative with their small business lending. How each lender uses the SBA program may contribute greatly to whether or not the lender will offer the loan.

When considering an SBA loan as a financing option, small business owners should consider both large national banks and small community banks. Large banks are active SBA lenders, but many borrowers opt to go with community banks that have a strong focus on business lending. Smaller banks tend to have more flexibility with approving loans and can offer a much more personalized touch to the business-lending process.

To increase chances of receiving an SBA loan, seek out a seasoned SBA professional or a small business loan expert with SBA loan experience. An expert will be able to navigate the nuances of the SBA’s lending programs while also fully explaining terms and assisting with the application process.