As the head of underwriting at VITAL, I have the privilege of working with lenders across many financial institutions. Invariably, when a lender calls me to discuss a new loan opportunity, there are four basic questions I am asked:
1. Is this loan eligible?
2. Will the SBA approve this loan?
3. What do we have to gather?
4. How long is this going to take?
Before I tell you how I answer these questions, let me provide some background information on the SBA.
The SBA Mission
The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. We recognize that small business is critical to our economic recovery and strength, to building America's future, and to helping the United States compete in today's global marketplace. Although SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same. The SBA helps Americans start, build and grow businesses. Through an extensive network of field offices and partnerships with public and private organizations, SBA delivers its services to people throughout the United States, Puerto Rico, the U. S. Virgin Islands and Guam.
The statement above was taken directly from the SBA’s website, and while it is accurate, there are some nuances that you as a lender and partner of the SBA should know.
The Simple Explanation of the SBA
In simple terms, the SBA can be thought of as an insurance company whose sole purpose is to help borrowers obtain loans from private lenders they would not otherwise be able to obtain.
I emphasized the terms above because they are important to understand. It can be easy to think of the SBA as a nebulous governmental agency, which in turn can foster a “they” vs. “us” mentality.
However, if we replace SBA with “we, the taxpayers of the United States,” it helps put into perspective who and what the SBA really is. In reality, there is no “they” – there is only “us.” SBA lending represents a partnership between people employed by the government and people employed in the private sector working together for common good.
The SBA program is one of the few truly successful public/private partnerships. Collectively, we, the taxpayers of the United States have formed this governmental agency to help our friends, relatives, and neighbors start and grow small businesses. We are willing to put our shared tax dollars to work in the form of a guarantee (insurance policy) to encourage private lenders to assist small businesses that would otherwise not be able to obtain a loan.
Understand that in the eyes of taxpayers, the program exists to provide a direct benefit to small business borrowers. Secondarily, it provides an indirect benefit to lenders. We must all be good stewards of the program and view it as an important resource to be safeguarded so it can provide benefit for generations to come.
Helping Only Those That Truly Need Help
This is the cornerstone of the SBA. It is so fundamentally important that the SBA has developed what is called the Credit Available Elsewhere Test.
By statute, the SBA must only provide assistance to borrowers who are unable to obtain credit at reasonable terms elsewhere. Per CFR 120.101:
SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources. SBA requires the Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar purposes and periods of time.
What Does This Mean to Me?
When the SBA was established, it was really set up to be the lender of last resort for small businesses. During recent years, the popularity of SBA programs have grown in leaps and bounds, attracting the attention of Congress. While Congress wants small businesses to flourish, they also want to ensure that the program is being used as it was originally intended. One would need to look no further than the Farm Credit System as an example of a governmental program that has strayed from its original mission!
Since no one likes tax increases, Congress has directed the SBA and its overseers to make sure that when the SBA obligates the taxpayers of the United States on a loan, the borrower truly needs the guarantee and otherwise can’t obtain conventional financing from any other source.
Therefore, it is critical that you clearly document in your credit memo why you, or any other lender in your market, cannot make the proposed loan without the SBA’s guarantee. There tend to be a few common and very acceptable reasons that lenders cite:
1. The proposed loan is undercollateralized.
2. The guarantee allows us to provide a longer amortization than we would normally allow.
3. The borrower is a startup with no proven track record.
Stay tuned …
In part two, we’ll address common questions about loan eligibility, approvals, timelines, and when/when not to pursue an SBA guarantee.