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Buying a Business: Top 10 SBA Loan Myths
Buying a business requires more than the willingness to operate a business and a good business plan; it requires financing! Many buyers attempt to secure financing on their own and the reality is that 84% of those loans are denied. One option is obtaining a loan through the Small Business Administration (“SBA”). Many buyers are hesitant to apply for an SBA loan because of certain common myths. This article seeks to dispel those myths and help readers determine whether an SBA loan is right for them. Here to help shed some light on SBA loans and discuss the top 10 myths is Steve Mariani, a business finance adviser at Diamond Financial. Diamond Financial has over 17 years of SBA loan experience and works with the most respected SBA lenders in the country, and consistently secures loan approvals. Here is a countdown of the top 10 myths, starting at number 10:
Myth 10: “It takes 9 to 10 months to get a loan through the SBA.”
Steve: Not true. At Diamond Financial, we have a high volume of SBA loans and our average deal takes between 48 and 52 days. So, when we are asked about time frames, we usually quote between 45 and 60 days. Some loans get approved in 2-3 weeks, but that's not the norm. Our overall national average is around 48 days from start to finish. If a buyer produces the documentation that we require, it’s a relatively painless process.
Myth 9: “Because the SBA guarantees the loan, the lender doesn't care if it's a good deal.”
Steve: That is absolutely false. The SBA monitors lender’s fault rates, and no one wants to put in a bad loan. Just because the SBA loan has a guarantee behind it does not mean that any lender is going to do our deal. It boils down to finding and choosing the correct lender, because every lender has a different set of criteria. For example, if you are trying to buy a carwash and this lender has never financed a car wash, then it is going to be a long and tedious process. Why? Because lenders do care if it’s a good deal; no one wants defaulted loans on their portfolio.
Myth 8: “The SBA application is over 100 pages. How am I going to get through 100 pages?”
Steve: That is actually not true. The average SBA application is about 23 pages. While it may look overwhelming in the beginning, there are only 6 to 8 pages that are needed from a borrower. The rest of the application requires information produced by the seller, such as the history of the business. A lot of the documentation required in the SBA application are things that others have produced already, whether it be the broker, or the seller, or whoever is involved in the transaction. So, out of those twenty three pages, 6 to 8 come directly from the borrower. The rest of the information is already out in the world, and it is just a matter of collecting and correctly assembling it to present to a lender. Unfortunately, this is where most people fail. Buyers do not understand this part of the application process and over 84% of applications are declined because of poor presentation. Being approved for an SBA loan is all about systematically compiling the application and presenting it correctly.
Myth 7: “You must own a house or have other collateral to qualify for an SBA loan.”
Steve: This is definitely a myth! This myth has been around for a long time and it is perpetuated because of this simple scenario: imagine your average buyer walking into his local bank asking for a loan. This average buyer has no house, no car, and no other collateral. The local bank denies the loan because he doesn't have the collateral required, according to their policies. Now, at that same local bank there is an SBA representative. What just happened is the buyer walks out of the bank thinking that the SBA representative and the local bank are the same and that he was just denied a loan for both. This is not the case. There are three basic things a buyer needs to secure an SBA loan: 1. a down payment; 2. good credit; and 3. a solid resume that shows you have the skills necessary to run the business you want to buy. Not having collateral in no way disqualifies you from securing an SBA loan.
Myth 6: “You must have a detailed business plan to get an SBA loan.”
Steve: No, you do not need a detailed business plan. Time and time again I have people come see me to help them with their application and they bring me an inch and a half book that details their business plan from start to finish. So many of these people are using these online business plan software writing programs, which can be a great tool, but they often take you off into a direction you do not need to go. For example, a lot of these programs anticipate where you will be 5 and 10 years down the road, including your advertising budget; it is just too much. What we are really looking for is the answer to this basic question: who is going to handle daily operations? And we want it answered in just a couple of pages; never a fifty page business plan. For our clients, we provide them with a detailed questionnaire, which asks them to answer questions, such as the anticipated hours of operation, who is going to be opening the store and who is going to be closing the store, who is the management and staff, who is going to be taking this business forward? It is more of how the operation is going to continue under your supervision. Lenders want to know that you have the ability to run the business they will be financing.
Myth 5: “No bank will do this loan, I've already asked them all.”
Steve: This myth stems from exhausted entrepreneurs who once eagerly walked into every local bank asking for a loan and, consequently, were denied by every local bank they walked in to. What buyers need to realize is that your local community bank is not going to put your $800,000 uncollateralized loan in its portfolio. For some reason, everyone automatically thinks “I need a loan, I should go to my local bank.” This is because the world insists that when you need a loan, you go to where your checking account is, or where you got your mortgage. But the truth is, those banks have absolutely no appetite for the transaction loans that we provide and that true SBA lenders provide. If you look at the top 10 SBA lending list in the country, they are not going to be your local community banks. For a community or local bank, uncollateralized loans devalue the bank. What buyers will soon discover is they have been asking the wrong people. Rather than blindly walking in to all local banks, a buyer should strategically choose where to apply for a loan.
Myth 4: “SBA loans cannot be used toward leasehold improvements or goodwill.”
Steve: Absolutely false. Big parts of the loans we write every single day include leasehold improvements and goodwill. If this were true, there would be no franchise start-up loans issued within the country. There would be no little mom and pop stores, or any of those stores in the strip center. A majority of these are financed through SBA loans.
Myth 3: “The SBA will finance 100% so I do not need a down payment.”
Steve: I hear this all the time and it is a big myth! So many buyers think “if the business comes with 25% worth of collateral or intangible assets, and the SBA is going to guarantee the other 75%, then the lender has no exposure, and I do not need a down payment.” This is absolutely not true. There will always be a required down payment on an SBA loan because no lender wants to put someone into a million dollar transaction with, for lack of a better term, no skin in the game. The only exceptions to this rule are leaseholds or rent replacements, where you have been operating out of a building for quite a while and now you are going to buy that building, or a partner buyout. Other than those situations, which are very rare, a buyer should plan to have anywhere from 15% to 30% down payment.
Myth 2: “My credit score should not matter because this loan will be insured by the government.”
Steve: Again, this is false; your credit score does matter. Lenders do not want defaulted loans on their books. The lender has exposure when it loans money to buyers and they have to make prudent lending decisions, according to the SBA rules. So, if you have a 500 credit score, it is going to be difficult to get a loan. However, there are exceptional circumstances. For instance, medical bills are a common occurrence these days, and lenders tend to understand outstanding medical bills. For the most part, especially after the financial disaster we faced in this country, a lot of people have some blemishes on their credit, and the majority of SBA lenders are understanding as far as that goes. However, if you have been a habitual late payer, and your credit has always been horrible, then it will be difficult to get a loan through a SBA lender, or any lending institution in general.
Myth 1: “You must be declined by three banks in order to apply for an SBA loan.”
Steve: No. But, this myth has its roots in the late fifties. When the SBA first created this program, they said: "if you cannot find financing on reasonable terms, we will consider backing your loans." What you had to do back in the late 50's and early 60's was prove to the SBA you had 3 official declines from banks. So, there is some truth to this myth. But, the 3 three bank denial requirement went away by the end of the 60's. Now, the SBA rule is if you can't seek financing on reasonable terms, which there aren't any terms more reasonable than the SBA, then you can qualify for an SBA loan. So, essentially, there is no reason to decline a potential borrower anymore.
Now, if you have a loan in place that it is on reasonable terms from a bank, then refinancing that with an SBA loan is going to be difficult. But, if the SBA loan will save you 10% or more through refinancing, then the borrower meets the SBA requirement that it “cannot find financing on reasonable terms,” and the borrow may have the opportunity to refinance the loan through the SBA.
Steve Mariani Bio
Steve Mariani ,Finance Adviser
Steve Mariani is a business finance adviser at Diamond Financial, the nation's leading source for business and commercial loans. Stephen Mariani has been involved in small business since 1978. He prides himself on being honest and his unparalleled integrity is what made Diamond Financial the company it is today: The Number One source for business funding in America....