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Thursday, March 11, 2010
De-Mystifying SBA Loans
I was visiting with a potential client this week who had applied for an SBA loan, he was excited about the possibility especially in light of the increase of the SBA guaranty from 75% to 90% and the waiver of the guaranty fee. He then went on to say that putting up only 10% of the loan amount for collateral was the real exciting part of the deal.
At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.
I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.
Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).
The SBA and the bank never intended for the guaranty to replace collateral and neither should you.
Comments or Questions?
At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.
I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.
Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).
The SBA and the bank never intended for the guaranty to replace collateral and neither should you.
Comments or Questions?
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