Some Business Owners Have Disdain for the SBA
But the problems these owners see are not always caused by the SBA. It’s complicated.
By Ami Kassar
My last column started something of a debate on LinkedIn, with several business owners expressing their disdain for SBA loans. Today, I want to respond.
Most small business owners have heard SBA horror stories of long, complicated bureaucratic loan processes that give them pause about considering an SBA loan. Some of these stories are true. But before you rule out the program as an option, I encourage you to take a deep breath.
In fiscal year 2024, 1,474 lenders made over 70,000 SBA 7(a) loans. Every one of those lenders has different credit policies and levels of experience and expertise with the SBA program. And every one of those borrowers comes to the table with a different story and level of financial health and sophistication. It would be a mistake to assume that your experience will be the same as some other owner’s experience. I have previously written about the “The Art of Picking The Right SBA Lender,” but I would emphasize that we always recommend working with an experienced SBA lender.
That said, SBA loans are not always the best solution, and there may be parts of an SBA loan that you don’t like. Some borrowers don’t want the lender to require a first lien on all company assets if the loan is greater than $500,000. Others might not like that if you own a home, the SBA will most likely require that a lien be placed on it.
Every loan product, including SBA loans, has pros and cons. Every time you are in the market for a loan, you should investigate your options and make sure you understand each approach. There are many variables to consider. What lien will the lender require? Will there be a personal guarantee? What are the annual percentage rate and payback schedule? What will the monthly payment be? And what are the prepayment penalties? If there are alternatives available, you need to evaluate each alternative before you make a decision.
Sometimes, I think the SBA loan is hands down the best option, but our clients don’t always agree with me. I remember a cleaning company we worked with early on at MultiFunding. We secured an offer for an $800,000 SBA loan at 6 percent interest, amortized over 10 years—but the offer required a lien on the owner’s house. The borrower was adamant that he would not accept a lien on his house, and the only other alternative we could find for him was a one-year loan for $350,000 from a private lender with an interest rate of 36 percent that still required a personal guarantee.
Much to my amazement, the cleaning company owner chose the one-year loan. He was utterly opposed to the idea of a lien on his house, and unfortunately, he went bankrupt a few years later.
Sometimes the decision is just about personal preferences. In another situation, an SBA lender offered an owner a 10-year amortization on a loan but required a lien on the owner’s house. A conventional lender, meanwhile, was willing to offer the same owner a loan at the same rate on a seven-year amortization with no lien on the house. So, the owner had to decide whether paying an additional $3,000 a month (for a shorter time period) was worth it to not have a lien on their house. That’s what they ultimately did, and I think it was a good decision for them.
In our work at MultiFunding, we use SBA loans about 95 percent of the time to help our clients meet their objectives and have the best chance for success. If you are in the market for a loan for your business, take your time. Do your homework. Explore your options. And then pick what is best for you.
Ami Kassar is CEO of MultiFunding.
