SBA Does Not Make Loans

Written by CMG News Contributor, Doug Carleton

With all the good and bad publicity the SBA received during the early stages of the pandemic (forgetting for a moment all that they got later) one fact was seldom mentioned. Congress provided the money – not the SBA. SBA was charged with administrating it, and banks were charged with actually making the loans. It was a recipe for chaos, and anyone who paid attention knew all of the created problems. But, the SBA was never created to administer anything like this – ever. Imagine that you’re the SBA, pursuing your normal functioning of guaranteeing loans to small businesses – over $28 billion in fiscal 2020 – a record. Then one day, you get a call from somewhere in Congress that says, “We’re sending you $349 billion (with a B) dollars, and we want you to get it out the door as fast as possible. A couple of months would be fine. No time to add people, infrastructure, or anything. Just get it out.”

Then the second call down the phone tree was the banker who normally makes the loans using their own funds. The caller from SBA says, “There’s plenty for everybody. Take what you want and lend it to every small business you can find who might be experiencing or about to experience difficulties due to the pandemic, and do it fast.” Fast is not a word that exists in a banker’s dictionary. Talk about the deer in the headlights. But for all the waste, fraud, favoritism, etc., that happened, even if only half of that $349 billion got to the right places, thousands of small businesses and thousands of jobs were saved due to the program.

Coming back to the title of this post, if someone says that they got or want to get an SBA loan, that loan is not an “SBA loan.” It is a commercial bank loan made by lenders approved by SBA and using their own funds. If the bank – using their normal credit underwriting guidelines – decides to make the loan, they will apply to the SBA for the guarantee. Whether or not to make a loan that the SBA would guarantee is 100% determined by the lending bank. The borrower has to qualify for a traditional commercial loan the same way they would if the SBA did not exist. Where the SBA comes into play is typically to cover a weakness. Banks don’t like “weaknesses” in their borrowers. If the borrower’s guarantor isn’t strong, or the collateral isn't sufficient, or the cash flow is a tad below guidelines, the bank will add the SBA guarantee to the loan to “cover the shortfall in the applicant. However, borrowers take note – if there is more than one weakness, even the SBA guarantee can’t make the loan look pretty.