What You Need to Know About SBA Loans

Every year, the U.S. Small Business Administration (SBA) helps Americans secure billions of dollars in financing so they can start or grow a business. At the same time, several myths and misconceptions continue to swirl around how SBA loans work as well as other affiliated programs. While some are harmless misunderstandings, others can make it more difficult to obtain financing or even cause business owners to forgo the option entirely. That's why it's helpful to get the facts right on these programs and allow business owners to make an informed decision on what would work for them.

Myth: The SBA Is A Direct Lender

One of the most common misconceptions about SBA loans seems insignificant but is actually crucial to our understanding of how they work. In most cases, the SBA does not provide the money that makes up its loan programs, nor does it collect any of the repayment or interest from borrowers. Instead, the SBA works with local financial institutions to guarantee a portion of its small business loans. With a federal promise to recoup some of the losses if a borrower can’t make loan payments, financial institutions lend to SBA borrowers with greater confidence. Of course, this guarantee from the SBA only applies to borrowers and financiers that meet its qualifications and approval process.

Myth: There Is Only One Type Of SBA Loan

The SBA works with financial institutions to guarantee loans with a variety of terms to fit business’s needs. The most popular is the 7(a) loan program, which small businesses use to fund major capital expenses. Lesser-known SBA financing programs, like the CDC/504 loan, help entities known as Certified Development Companies finance real estate or equipment purchases. The SBA also underwrites very small loans (microloans) for startups, or even guarantees funds for American businesses in need of repair after experiencing a natural disaster.

Myth: The SBA Only Underwrites Loans

Financing isn't the only tool in the SBA's arsenal — it also connects small businesses to other programs that advance its mission to support business owners and entrepreneurs. These include tools and resources for companies seeking federal grants or publicly funded contracts, some of which can be found at grants.gov. The SBA also assists local businesses through various classes, seminars, and other events geared toward finance and management topics. Along with business counseling services available at its local branch offices, these events make the SBA a leading voice in communities around the country when it comes to issues or advice relevant to small businesses. A knowledgeable, expert SBA lender will help you determine which of the many SBA resources you can leverage to help maximize your business success.

Myth: SBA Loans Are A Commodity — The Bank I Choose Doesn’t Make A Difference

You might be inclined to visit the bank around the corner when you need a small business loan. However, when it comes to SBA loans, not all banks are equal. First, not all banks offer SBA loans. Within the smaller subset of banks that do offer SBA loans, you’ll notice that some are recognized by the U.S. Small Business Administration as Preferred Lending Partners (PLP) and some are not. The SBA says PLP lenders have “a proven track record in processing and servicing SBA loans.” The SBA offers several free online courses, including some that go into detail about how SBA financing works. It’s important to choose the right small business financing to ensure your business’s health for years to come, but it can be difficult to decide. That’s where the experts at First Business, a PLP lender, are a crucial advantage in your funding search. With SBA experts who not only expedite and ease the application process, but also have decades of industry-specific experience, you’ll notice the difference immediately. Reach out today so we can get started learning your business goals and how we can help you achieve them.