Is SBA Still mysterious Black Hole?

By: Parag Nevatia | July 2020

We all know about Sci-Fi movies and space. As children, we flew imaginary spaceships while watching Star Trek and Star Wars. It sure was a lot of fun. We were introduced to the mysterious Black Holes in the universe with scary creatures. We learned that these black holes were an entrance to mysterious canals where we would get stuck and not be able to get out. Humans have always been afraid of mysterious things such as space, however, I am going to talk about what is perceived as a black hole here on earth, in our financing world, every day. People seem to be dismayed by this mysterious financing “black hole” right in the heart of our town, on Main Street. I am referring to SBA loans. 

SBA Loans Post 2008

After the 2008 global recession, lending dried up in the conventional world. Big institutions perished due to debt burdens and/or erroneous audit procedures. During the crisis, the government had to complete stress tests to see which lenders were still financially stable, and although reluctant, encouraged them to go back and start to lend again. They were given strict instructions to lend to business owners that had reserves, relevant industry experience, who historically paid on time (strong cash flow), and maintained quality control to ensure repeat customers. Underwriting became tighter as auditors began scrutinizing loan files. What picked up, slowly but surely, was a handful of banks that started following SBA programs and guidelines, which in my opinion, brought about a wave of corrections to erroneous conventional lending methods. There are dozens of other such corrections in the SBA Regulations that were made over the past 20 years to enforce that participating lenders make prudent and documentable decisions.  

Change was necessary.

Many commercial lenders told me not to get into the SBA world because it involves a lot of documentation and is painful. However, I believe that many people from the conventional planet do not really understand the benefits of the SBA. Maybe it takes a lot of time and effort to read the 400 pages of the SOP’s, but those who did read and followed the SOP’s, migrated to the SBA world just as I did.

Fast forward – 2020 Covid19 Crisis hits the globe including our backyard.

So now we have some questions to ponder.

• Is SBA a black hole anymore? 
• Did SBA come to rescue small businesses?
• How has what used to be a painful thing to many loan seekers in the past, suddenly, become a savior to them during the COVID-19 pandemic?
• Are SBA programs helping those who once thought SBA loans were a black hole?

Here’s an example; someone called me recently and said they should have considered taking our advice and went ahead with an SBA loan a couple of years ago, just so that they could have received the benefits of SBA during the COVID-19 pandemic. 

Okay so let us look at some of the common benefits of the SBA programs:

• Lack of Collateral is not looked at as the worst thing on the planet. We have helped many clients close on loans with very little or no collateral. 
• Down Payments can be as low as 10-20 percent, not 25-30%.
• Personal IRA’s do not have to be diluted just to get a loan. They can act as a demonstration of strength to get an SBA loan.
• Gifts are acceptable forms of equity subject to some terms.
• Credit Scores that have a dent on them do not get brushed aside. SBA gives the entrepreneur an opportunity to explain why there is a dent.
• Expertise/Experience acts like an asset that the entrepreneur carries.
• Projections with a model, assumptions, methodology, and logic translates into approvals and can changes lives.

I can go on and on, but the point is that SBA is a balance between logic, data, creativity, methodology, and regulations, which is almost impossible to find in the conventional lending world. This is the power of the SBA! Not to forget what SBA has done for millions of American businesses during the COVID-19 pandemic. PPP and EIDL programs have helped many businesses in many ways. 

The SBA is not a black hole.

The SBA route is no longer a preference, it is a way to fix some faults in some previous lending practices and a tool designed to scrutinize and keep a check on the lending process. Therefore, as you can see, SBA is not a mysterious black hole where you would get lost and can never get back from. It is, in fact, designed to give the entrepreneur the ability to find mitigants to weaknesses and continue to start, acquire, or grow a business. It is prudent to embrace it because, sometimes, change is necessary.

More information on this topic can be found in our previous post, "SBA - a mysterious Black Hole." https://ezfundingsolutions.com/a-mysterious-black-hole-the-sba/

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