On a daily basis when talking to clients who are thinking about getting an SBA we find that there is frequently a misunderstanding of what the SBA is and the type of relationship they have with banks. The goal of this chapter is to give you a brief history of the SBA and dispel some common misconceptions about the SBA.
What is the SBA?
Challenges in Lending to Small Businesses
American small business owners and aspiring entrepreneurs have long felt the pain and challenges associated with small business lending. At the root of the problem is the way banks traditionally assess borrowers for loans — approving only businesses that pose the least potential risk. Larger corporations with more resources to turn to, longer track records and more liquefiable assets appear more attractive to lenders than the little guy.
The U.S. government has long recognized that small business is the backbone of the American economy — crucial to creating jobs, sustaining a competitive market and driving innovation. The SBA was created to address the disparity in access to funding between large companies and small businesses, and to address the risks associated with lending to small businesses.
Overview of the SBA’s History
According to the SBA website, our government’s concern for small business lending dates back to the World War II era, when large production companies grew quickly in response to wartime defense contracts and small businesses were left to struggle. This led to Congress creating the Smaller War Plants Corporation, which provided small businesses with an avenue to participate in government contracts and gain financial support.
The SBA officially came to be in 1953 and was chartered to “aid, counsel, assist and protect, insofar as is possible the interests of small business concerns” as well as to ensure small businesses receive a ‘fair proportion’ of government contracts. Since their inception, the SBA has grown to offer lending guarantees, nationwide counseling and resources, disaster relief and many other programs.
What does the SBA do?
While the SBA has multiple lending programs, counseling services and support offerings — all of which help the American small business owner — they almost never finance loans. Instead, the SBA encourages financial institutions to lend to small business owners by guaranteeing a portion of that loan.
5 Common Misconceptions About the SBA
The SBA does not lend directly.
As we’ve discussed, almost all SBA lending is actually done through individual banks. The SBA guarantees a large portion of the loan, which mitigates much of the risk and encourages banks to work with small business owners.
Some banks are SBA Preferred Lending Partners.
One of the best ways to simplify and expedite the SBA lending process to work with a bank that has Preferred Lending Partner (PLP) status. Non-preferred lenders must send the loans to the SBA for approval, which can add weeks to the process, while PLPs have the authority to make the final credit decision.
SBA loans do require collateral.
Many borrowers assume that because the government guarantees SBA loans, they don’t have the same collateral requirements as other bank loans, but that’s not the case. Almost all lenders require the business owners to sign a personal guarantee to secure the loan.
A good credit score does not guarantee loan approval.
Although having a healthy credit score and history is essential to being approved for an SBA loan, there are several other important factors as well.
Loan approval is not solely based on the business.
Many entrepreneurs are under the impression that if they’re funding a business with a history of strong revenue (or strong projected revenue) that their application will automatically be approved, but that’s not the case. Lenders also look at many other factors, including personal credit score and history, before approving a loan.
Small Business Development Centers
Both current and aspiring small business owners can take advantage of the robust resources offered through the SBA’s Small Business Development Center (SBDC) program. With locations in every state (63 nationwide), the SBDC provides assistance with marketing, finance, production and technical programs to anyone interested in small business ownership. They can also provide help to anyone seeking funding through an SBA program.
The SBA’s SCORE association, also referred to as “Counselors to America’s Small Business”, is a nationwide nonprofit made of over 13,000 volunteers. These volunteers serve as business counselors and mentors to both current and aspiring business owners at no cost. With over 348 U.S. chapters and online counseling services and workshops, SCORE services are easily and readily accessible to anyone seeking guidance as an entrepreneur.
Office of Women’s Business Ownership
For almost 40 years, the SBA’s Office of Women’s Business Ownership (OWBO) has sought to help women overcome barriers to success on their entrepreneurial paths. The OWBO provides focused finance, marketing, management and tech support for women who currently own or are working toward owning a small business. The OWBO also helps connect women with other SBA resources such as the InnovateHER Challenge, resource partners and special procurement programs.
Additional SBA Resources
The SBA exists for the sole purpose of supporting small business. So if there is an element of business ownership you need support with, chances are the SBA can help. From programs supporting underserved and underrepresented entrepreneurs to lesser known funding programs and assistance with contracting, the SBA has a wealth of resources meant to help you succeed. If you’re looking for help, a great place to start is the SBA website and their Small Business Resource Guide.