Who are SBA loans for?
SBA loans are for businesses that are:
SBA Loan Industry
The SBA loan industry can be divided into distinct categories:
- The largest United States Banks, such as Bank of America and Wells Fargo, generate the bulk of their SBA loan volume by the loans, especially the express loan and business line of credit, being offered to those who would be declined for a normal bank loan due to factors such as length of time in business or slightly stricter affordability factors. These banks have sophisticated computer systems that generally makes this process seamless, and are quite different from other financial institutions who utilize SBA lending for separate and distinct purposes
- SBA loans are used heavily by banks of all sizes to finance the purchase or construction of business owner occupied real estate (i.e. real estate purchased by a business). Many banks only offer SBA loans for this purpose. In particular, they are using to finance properties that the bank would consider too risky to finance on their own, due to them being of a special or environmentally risky nature that can make their resale value limited; these properties include Motels, Gas Stations, and Car Washes.
- SBA loans are also used to allow individuals to buy existing businesses. Since, unlike in real estate transactions, commercial lenders are allowed to pay a referral fee to business brokers who help people buy and sell businesses, this segment of the industry is dominated by smaller banks and standalone finance companies who engage in this practice.
Businesses applying for SBA loans are supposed to be ineligible for financing elsewhere, as the applicant bank affirms. Designed to avoid direct competition with banks, this provision allows the most promising projects to be funded by the private sector, leaving higher risk projects to be picked up by the government, resulting in the government holding a higher share of non-performing loans.
Though it accepts higher risk, most SBA borrowers pay their loans, the same loans that lenders affirm could not receive credit elsewhere. The Agency has traditionally had a currency rate on its loans of 90% or more, not meaningfully worse than banks.
Others have attacked the SBA as a fount of corporate welfare. Despite its expenditures, the SBA aids only 0.4% of the entrepreneurs in the United States, if one includes all manner of home-based businesses like lawn-mowing services or quilting or snow shoveling. However, it is consistently the greatest provider of small business credit in the country; not all small businesses seek credit or counseling every year.
The SBA is also one of very few agencies that pays its own way and does not drain the treasury for its loan programs. Price Waterhouse affirmed, some years ago, that the tax revenue generated by only a handful of SBA startup loans more than paid all the operating expenses for the Agency.
One of the primary uses of SBA funding is for business owners to get a loan to buy the property their business occupies. Owning the property and having the business rent the property from the owner is a form of a tax shelter, so the SBA has been criticized for aiding tax shelters. Of course, legally taking advantage of tax law provisions is completely ethical.
Various banks are often criticized for offering or writing fewer SBA loans proportionally than other banks, which critics see as a sign of discrimination. However, others counter that SBA loans are equivalent to or many times worse than what the banks offer themselves, so a customer of that bank might choose the normal bank product more often than their SBA product.
The SBA has most recently been criticized for the manner in which it disbursed loans earmarked for businesses directly affected by the September 11, 2001 attacks. Lax oversight resulted in widespread abuse of the program as the low-interest loans were awarded to unaffected business including "Dunkin' Donuts shops and florists...motorcycle dealers and chiropractors...a South Dakota country radio station, a Virgin Islands perfume shop and a Utah dog boutique," many of them unaware of the special program.
