The Three Biggest Myths About the S.B.A.

I want to share with you what I consider to be the three biggest myths about the Small Business Administration. But let me be clear: I am a big supporter of the S.B.A. My company, MultiFunding, brokers loans, and we put about 25 percent of our clients into S.B.A. loans. I think it’s a good program with a lot of economic benefits. It’s also terribly misunderstood by many of the small-business owners we talk to.

So let’s debunk some myths.

1. The S.B.A. Lends Money.

We get several calls a week from owners who tell us that they have been turned down for an S.B.A. loan and that the program is not for them. Their perception is that if they are granted an S.B.A. loan, it is the S.B.A. that will be lending them the money — and therefore if one bank says no, there is no point in trying again for an S.B.A. loan. This, of course, is not the case. The S.B.A. is a government guarantee program; it loans no money, but issues guarantees to lessen the risk for the many banks (and a handful of nonbank lenders) who actually make the loans.

Because the government is involved, S.B.A. lenders have hundreds of pages of rules and regulations they have to follow. (I’ve never actually seen the book with all of the rules, but I imagine it would be great insomnia therapy.) What’s amazing to me is that despite all of these rules and regulations, lenders have great latitude in the loans they offer.

Sometimes at MultiFunding we feel like trying to match an S.B.A. lender to a particular loan is like playing the lottery. A loan that doesn’t work for one lender today might work for a different lender tomorrow. This is why we strongly recommend that borrowers check out at least three S.B.A. lenders before concluding that the S.B.A. program is not right for them.

2. When the S.B.A. Guarantees a Loan, There is No Need for Collateral.

Some small-business owners think that if the S.B.A. backs the loan, there should be no need for them to put up collateral (a house, for instance). But this is not the case either.

Lenders are required to take all available collateral and take a blanket lien on all company assets when making a 7(a) loan. The government is guaranteeing a large percentage of the loan, but it will honor that commitment only if the borrower is willing to put his or her neck on the line, too. I think this is fair.

However, it’s important to know that with some lenders you don’t have to have dollar-for-dollar collateral available for your loan. A bank can make an S.B.A. loan even if the borrower doesn’t own a house (or even if the borrower has a house but no equity in it). But to clarify — and this is why people get confused — if you do have collateral available, the S.B.A. insists that banks take it.

3. S.B.A. Loans Are as Easy to Get as Other Commercial Loans.

The third myth seems to live in the halls of Washington rather than on Main Street. In a recent interview with Robb Mandelbaum of You’re The Boss, Karen Mills, the S.B.A. administrator, suggested that it was just as easy to get an S.B.A. loan as any other commercial loan.

That might be true — if it weren’t for that big fat black book with all of the rules and regulations. At MultiFunding, we almost always recommend that qualified borrowers seek a straight commercial loan instead of an S.B.A. loan (there are some exceptions when it comes to real estate). We suggest this in the hope of avoiding all of the potential roadblocks in the S.B.A. process. The reality is that there are a lot more rules, forms and regulations in an S.B.A. loan — and there should be. After all, the government is backing the loan. But let’s not pretend it’s easy.

The complexity of the S.B.A. process is all the more reason to pick your S.B.A. lender carefully. If the S.B.A. is right for you, make sure that you’re working with a lender that really knows the program and has handled S.B.A. loans many times. This is your best shot at a good outcome.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.