[Quickfunder]

What is it about SBA programs that more merchants aren't doing them, with exception to the time it may take to be approved?

I've done some research and it seems like SBA prides itself on being an excellent resource for access to capital. Low rates, long terms. Network to countless lenders. Loans, lines of credit and microlending.

I am not talking about our MCA clients who are stacking, 5 mth behind in rent or so underwater they are days from shutting down. I'm talking about the mid-level merchants who qualify for their average volume and otherwise decent criteria.

What am I missing? Also, what has the experience been in the MCA world in taking those clients who might qualify and applying them for SBA's?

[Chambo]

All the SBA does is guarantee loans that traditional banks underwrite and fund. Last I read, they were guaranteeing up to 80% of the loan to banks.

Issue is, with such thin margins in traditional bank loans, and the current default rate on business loans, it doesn't become profitable until you are into the million + range.

How many merchants that we deal with are at that level?

The days of the $20-50-100K SBA loan are over

[Sean Cash]

My friend is a senior commercial loan underwriter for a major bank. They don't state it publicly but their policy on lending to restaurants and retail businesses is to decline them 100% of the time with no exceptions whatsoever under any circumstances.

The smallest loan they like to do is 500k. Anything lower than that is a waste of time and carries too high a risk of default or delinquency. They say "waste of time" because traditional banking is very old fashioned. The bank employs regional sales reps who maintain relationships with the big businesses in the area. When the business is in the market for money, the sales rep lobbies the business for months to go with them for the loan. Often times the business will shop around and be courted by bank sales reps through golf outings and lavish steak dinners. Once the the business picks the bank he's going with, the underwriting of the loan usually takes about 6 months, though my friend says he's worked on loans that took more than a year to approve. Some sales reps will only close 2-5 loans a year and work all day every day for a year to make those deals happen. There is no "next day approval" or funding in 5-7 days.

They won't work with small businesses despite SBA guarantees because they said those businesses are too "flaky". His words, not mine. They're notorious for delinquency and the bank doesn't stand to make any money on the deals because they're too small. Interestingly enough, he said the bank often times still loses money on loans between 500k - 1 million. The cost of courting the client and the underwriting are higher than the interest they stand to gain. However, they can make up the losses on providing the business with other services and fees so it is still worth it in the end.

A lot of these loans get included in national statistics on bank small business lending. You see numbers like $100 billion to small businesses by banks and wonder how the hell everyone we speak to can't get a loan. It's because a million dollar loan to company doing 10 mil in annual sales with 500k cash reserves is being booked as a small business.

[Quickfunder]

Begs the questions; how did banks ever make money off loans in the first place, before this whole economic downturn? Or another way to phrase that: how did businesses get funded before MCA came into play?

Loaded question, I know.

Thanks Chambo and Sean for drawing all that into perspective. Somewhat disturbing to see how much SBA puts themself out there as a saint for small businesses looking for money.

[markcrane]

How did they get funded? Before implosion, the SME market was financed through HLOCS and home equity loans. Then small business financing became nothing but collateral damage.

[Sean Cash]

"One reason for the slow volume on small loans: it can take almost as much time to originate a $125,000 SBA loan as it does for those greater than $1 million, and banks make more money on the larger credit, says Ray Chiamulera, president of Radar Lender Services, an advisory firm."

source: http://www.americanbanker.com/magazi...1063590-1.html

[Finance1]

Two biggest obstacles are loan size and collateral. There is no appetite for under $250k in the broker world. You can't get them done.

Then there is collateral. Although commercial real estate isn't "required" to get a deal funded, good luck getting one done without it. Some exceptions are medical practices and things like that. Loans without RE collateral still require the guarantor(s) to put up personal collateral because business assets typically fall far short. SBA guaranties require 1-1 collateral in some form or another. Personal real estate is often tied to the guaranties. This has many caveats to the borrowers. Having a $500k lien (typically second position behind their primary mortgage) against their $300k house traps them from being able to do any type of cash out refi or equity line.

SBA deals are expensive. The cost of a commercial appraisal and phase 1 environmental is $4-5k. That's out of pocket. Even smaller bank originated "working capital" sba loans come with plenty of restrictions on use of funds.

SBA loans are zero competition to our market, have a very low success rate, and those that qualify typically have traditional bank resources for capital.