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The Good, Bad, and Ugly of SBA loans

Updated on August 16, 2009

Small Business Administration (SBA) Loans

This article will provide some clarity to the inner working of the various Small Business Administration (SBA) loan programs and the significant role they play to our overall economy in being the essential financial lifeline to many small and medium size business owners in the country.

Let's first begin with the disclaimed position and that which will be further detailed in this article that the "Good" in the various SBA loan programs collectively exceeds the "Bad and Ugly" that is inherited with these government sponsored programs.

There exist some misconceptions about the SBA programs that is also worthy of discussion in this article. A major misconception about the SBA loan programs is that the US Federal Government is the actual lender and provides direct loans to business owners. Another misconception is that the SBA loan programs should be business borrowers last choice option for securing a business loan. Lastly, a third big misconception to name a few, is the belief that all SBA lenders are the same.

In fact, the US Federal Government does not lend money directly to business owners. The loan proceeds are provided directly by program participating banks and non-bank financial institutions. The US Federal Government plays an essential role in providing these banks and and non-bank lenders with loan loss guarantees typically up to 75% to 85% of the loan amount. This loan guarantee allows SBA lenders to approved loans that they otherwise would not have approved without the loan guarantee supporting the business loan.

Although it can be said that there are many small business loans that would not qualify for a conventional business loan had it not been for the supporting loan guarantee there is also a representation of business loan transactions that would qualify for either a conventional loan or an SBA loan option. The ultimate decision on which loan structure to select is typically made on a couple of factors: (1) The total amount of equity injection - 10% to 30% SBA loans vs 20% to 50% Conventional Loan, (2) Loan Term/Amortization - Up to 10 years and 25 years with real estate SBA loans vs 5 to 7 years and 25 years with 5 year balloon note with real estate Conventional Loan, (3) Interest Rate - Prime (3.25% as of August 09) + 2.75% = 6.0% SBA loan vs an equivalent 10.00% fixed rate Conventional loan, (4) timing - Closing a business loan varies from lender to lender and each transaction is unique, however, as a general rule conventional loans will fund faster than an SBA loan structure.

Not all SBA lenders are the same or will reach the same conclusion in approving a loan. In fact, each SBA lender has it's own internal credit approval process and guidelines for each type of industry and credit quality borrower that meets their internal risk management. Some SBA lenders are national while others are only regional or local lenders. SBA bank lenders typically are relationship focused with interest in the business deposits and selling other non-credit banking business services while non-bank SBA lenders are typically more transaction oriented.

Primary SBA loan Programs:

  • SBA ARC Loan Program - The SBA ARC (America's Recovery Capital) Loan Program is relatively a new SBA loan program and was created as a result of the current economic recessionary markets. Unlike the other SBA programs, the ARC program is temporary with an expiration date. This program was specifically implemented to assist small business with current cash flow constraints and problems with having the ability to cover there operating expenses. The SBA's American Recovery Capital (ARC) Loan Program will provide up to $35,000 in total funding to qualified small businesses. The ARC loans will be made by certain SBA lenders as long as the program allocated funding remains available or until September 30, 2010, which occurs first.

The "Good" benefit of the SBA ARC Loan Program is its intent to provide some immediate relief and support to small business operators experiencing cash flow operating problems during this challenging economic period. The benefit of the program to borrowers is the loan is interest free with no principal repayment for the first 12 months and the SBA will make the interest payments to the lender. The ARC loans require no collateral or closing fees and will be 100% guaranteed by the SBA. The "Bad" is that the maximum dollar amount is small and is very limited to the number of small business owners that it would have any meaningful impact. The "Ugly" is the program is on a first come first serve basis. The program will expire once the $336 million in program funds is used or by September 30, 2010, whichever comes first. Currently there are over 400 lenders that have funded ARC loans.

  • SBA Patriot Express Program - The SBA Patriot Express Program was created in 2008 with the purpose to provide incentive to SBA lenders to extend business loans to military personal. The maximum loan amount under this program is $500,000 and the SBA provides a guarantee up to 85% of the loan amount.

The "Good" about this program is that is not only Active Military personal is eligible but also Veteran (other than dishonorably discharged), Active Duty members, Reservist and National Guard, and current spouses of any of the above groups. The "Bad and Ugly" is that not many military personal is not fully aware of this program and extended opportunity.

  • SBA Express Loan Program - The SBA Express Loan Program has been in place for many years it is mainly used by banks to finance smaller business loan transactions. The SBA Express loan maximum loan amount is $350,000.

The "Good" loan approval are relatively fast within 36 hours and revolving loans up to 7 years with maturity extensions are allowed. Lenders are also not required to take collateral for loans up to $25,000. However, the lender may use their in-house credit guidelines on collateral policy for loans greater than $25,000 up to $350,000. The "Bad and Ugly" is that this program has a higher borrowing cost then the other SBA loan programs. Although lenders and borrowers can negotiate interest rate, lenders may charge up to 6.5% over prime for loans under $50,000 and up to 4.5% for loans over $50,000. Unlike, the 7(a) loan program for example in which the maximum spread over prime is 2.75%. The other limitation with the SBA Express Loan program is that not all SBA lenders participate in this program this product tends to be more utilize with local and regional banks.

  • 7(a) Loan Program - This is the SBA flagship loan program and that is widely used in the market. The SBA 7(a) program allows lenders to finance projects up to $2 million. The loan proceeds can be used to finance start-ups, business acquisitions, purchase equipment, and certain refinancing of existing debt is eligible. The loans are structured on full 10 year terms and amortization schedules without any balloon payments for non business real estate transactions,and up to 25 year terms and amortization without any balloon payment for real estate based transactions. Only owner-operators businesses are eligible and the program is not intended for passive investments. The 7(a) Loan Program is widely used in the market for small franchise business operators to open or purchase a new franchise unit. The benefits of using the 7(a) SBA loan program to finance say a start-up franchise business is that all project cost is eligible such as the initial franchise fee, starting inventory, equipment package, tenant leasehold improvements, start-up marketing and training cost, working capital, and closing cost. Additionally, the franchise operator maybe required to provide a minimum equity injection on the total project cost in the range of 10% to 30%.

The "Good" is that this 7(a) program provides the greatest reach to a broad industry base and is made available by many bank and non-bank lenders. The advantage of the 7(a) loan compared to a conventional loan structure is that the borrowers will typically require a lower equity injection - preserve capital to investment, a lower interest rate and have a longer loan term and amortization - lower monthly loan payments then a typical conventional loan. The "Bad" is the loan process may be a longer process and more paperwork then a conventional loan - but this also all depends on the selected lender and their experience in underwriting this loan program. Unlike, conventional loans the interest rate on the SBA 7(a) program tends to be a floating rate with periodic payment adjustment rather than a fixed rate. However, some lenders will offer fixed rate options for certain real estate or business acquisition transactions. Again this varies from lender to lender. The "Ugly" all principals with greater than 20% ownership interest in the business will be required to personally guarantee the loan. Again unlike a conventional loan the SBA lender will most likely require to file a lien on your personal real estate property if there exist any significant equity.

  • 504 Loan Program- The SBA 504 loan program is typically used to finance larger project with real estate and that do not qualify for the 7(a) program because loan size is greater than $2 million. Unlike the SBA 7(a) program the 504 program is used only to finance business real estate - land and building and business equipment. Some lenders will use the 504 program instead of the 7(a) program for smaller owner-occupied real estate acquisition transactions less than $2 million. The 504 loan program consist of two loans. The first loan is made by the bank or non-bank finance company and the second loan is made by a CDC (Certified Development Corporation). The CDC loan maximum is $2 million ($4 million for green Leed certified projects). The CDC portion of the loan is guaranteed by the SBA. The bank's first loan does not have a SBA guarantee - as the bank holds a 1st lien position on the financed asset and advances typically up to 50% of the project cost based on a 25 year term and 25 year amortization. This first loan can also be a fixed rate or floating rate. The CDC/SBA loan holds a second lien position and will advance up to 40% on the financed asset structured with a 30 year term and 30 year amortization on a below market fixed rate. The remaining 10% minimum equity injection is provided by the borrower.

The "Good" is that the 504 loan program can be used to finance new construction and acquisition of larger owner-occupied businesses with real estate and hotel projects. The longer terms and amortization schedules and fixed interest rates on both the bank and CDC notes provides the borrower with the greatest cash flow coverage and interest rate risk protection. The 504 loan program pricing, term/amortization, and minimum equity injection in most cases will be more favorable to the borrower then an alternative conventional loan option. The "Bad" unlike the 7(a) program many cost under the 504 program in ineligible to be financed such as franchise fees, working capital and inventory. The 504 program is only limited to owner-occupied real estate and no investment or multi-family properties qualify. The "Ugly" the 504 loan program primary purpose is to provide small business owners with long-term financing and not intended to be used as a bridge loan - therefore prepayment penalties in the early stages of the loan are very high. Lastly, since the 504 loan is two separate loan notes it requires two separate loan approvals and credit reviews - this can result in a longer approval and funding process.


In addition to the various SBA loan program the SBA provides other programs, resources and tools to small business owners. For more information on these and other SBA loan program visit


Written by: Reginald Heard, President - Bankers One Capital

For information about SBA loans and business financing you may contact Bankers One Capital at 1 877 262-1333 or email us at



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