Online Extra: A Short Guide to SBA Loans

Banker Ted Morgan explains just who makes the best candidates for government-backed financing

When a small-business owner can't meet most lenders' credit standards, an SBA-backed loan might be the answer. The federal guarantee makes it more attractive for banks to lend to small companies, particularly newer ones or those in notoriously risky industries, such as restaurants.

Where can you find an SBA-backed loan? Around the country, there are 485 preferred SBA lenders -- lenders who don't need to consult the SBA on each loan application. That speeds up the process considerably. You can find a list of preferred SBA lenders near you on the SBA web site. (

BusinessWeek Small Biz's Naween A. Mangi spoke with Ted Morgan, head of the credit department at Broadway National Bank in New York, about SBA-backed lending and how to determine if it's appropriate for your business. Broadway National, with $140 million in assets, is a preferred SBA lender, with 50% of its portfolio in SBA-backed loans. Here is an edited excerpt from the interview:

Q: Who is the typical candidate for an SBA-backed loan?

A: The stated purpose of the SBA's loan program is to make as many loans to small businesses as possible. Everyone is eligible for these loans. In the retail and services sector, it's companies with a maximum of $20 million in sales, for wholesales its a ceiling of 100 employees, and for manufacturing it's 500 employees.

Q: Is this a road startups would usually take?

A: Startups and acquisition cases are prime SBA candidates because they don't have a track record. Banks judge loans by the ability to repay, i.e. looking at cash flow, and stability -- the net worth of the company. You don't find that in a startup, but the SBA allows you to make that loan based on a projection. And so the bank uses that guarantee in place of what you would like to see on a good, solid balance sheet.

Q: So someone would only consider an SBA loan if they can't get a loan anywhere else?

A: The SBA is at the bottom of the feeding chain. It's not where the borrower starts out. But there is no reason for that except that there are a lot of myths about the SBA. People think the rates are higher and it takes a lot of time. But that's certainly not true for us. Sometimes we can even give a lower rate because we have a good guarantee. After all, the rate is a function of risk.

Q: How large a loan can you get through an SBA-backed program?

A: The SBA provides guarantees up to $1 million. So for a bank to take full advantage of the 75% guarantee, the loan could be $1.33 million. But a bank can make a loan up to $2 million and get just a 50% guarantee. On the lower side, most banks will not do loans smaller than $100,000.

Q: Does it end up being more expensive to get an SBA loan?

A: The main fee is the SBA guarantee which ranges from 2% to 3.5% of the guaranteed portion of the loan. But if real estate is involved there are appraisal fees and then there can be attorneys fees. As far as loan rates go, we can charge as little as we want. We cannot charge more than 2.75% over prime for any loan over $50,000, or 2.25% over prime for any loan less than $50,000.

Q: Many entrepreneurs worry that the paperwork on an SBA-backed loan will be cumbersome. Is that a real problem?

A: It is a little more complicated and there is some more paperwork, but it's not staggeringly different. Maybe it is for banks who are not geared up to handle a heavy volume of SBA loans, and they may treat it as an unsecured loan that has to be approved by a 20-man committee.

Q: What sort of paperwork is required?

A: You need to fill out a four-page SBA application form, submit a single-page personal resume form, as well as forms acknowledging that the borrower is aware of his rights under the law.

Q: Do the SBA-backed loans always have to be collateralized?

A: The SBA doesn't insist on complete collateral, but if there isn't sufficient collateral and if the principal has personal assets, the SBA requires the borrower to include those as collateral.

Q: Is it common for an SBA-backed loan to be refused?

A: If the borrower has really poor credit, then it's a sure thing the loan application will be declined. We have to stay within the boundaries of proper banking and have the reasonable assurance we will get paid back. And our failure rates for SBA-backed loans are the same as for the rest of our portfolio.

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