In my last post, I mentioned that I’m frequently asked why SBA loans aren’t more common on Main Street. I believe the reason is that SBA loans are, in many ways, not a good fit for either the SBA lender or the Main Street business owner.
That results in both a supply problem and a demand problem. I discussed SBA lender reluctance-the supply side. In this post, I’ll talk about the demand side of why main street business owners are skeptical of SBA loans.
In my experience, main street business owners shy away from SBA loans for several reasons. First, the paperwork and documentation required for an SBA loan are significant and burdensome. The SBA 7(a) loan requires, among many other items, a statement of your personal history, 3 years of personal tax returns, 3 years of business tax returns, a resume for all owners, a business plan and a written history of all previous loans and loan applications. At BriteCap, we work with busy owner-operators on main street every day. These folks are behind the cash register, on the sales floor, in the stockroom, you name it. They also don’t have clerical staff, so they’re the ones who typically have to prepare and assemble all this documentation. The owner’s time is hugely valuable to their business, so there’s a big opportunity cost when an owner is filling out paperwork instead of tending to their business.
Another reason that main street is skeptical of SBA loans is that they are hard to get. In our experience at BriteCap, very few business owners who want an SBA loan actually receive one. Some SBA lenders will mention high approval rates, but typically that is because they pre-screen would-be SBA applicants upfront and discourage the majority from applying. There’s nothing wrong with this, the loan officer simply doesn’t want to waste his/her time- or the applicants.
And speaking of time, that’s yet another reason for the unpopularity of SBA loans. Small business owners have heard the horror stories of how long it takes for approval and how many times the SBA underwriters come back with additional information requests. Opportunities for a small business to grow like taking advantage of an inventory savings or a special advertising discount, don’t announce themselves with months of advance notice. So, what is the point of applying for a loan that will not be funded in time for your business to take advantage of an opportunity? Have you heard the old saying: justice delayed is justice denied? Well, we believe that a loan delayed is a loan denied.
I could go on with more reasons, but I think you get the picture: the documentation, the credit requirements, and the time involved all make SBA loans a poor fit for main street businesses.
Is there any good news here? Well, yes. I believe the SBA would probably agree with what I’ve written above- off the record, of course. In fact, I think the popularity of business loans provided by companies like BriteCap are causing the SBA to evaluate how it can be more main street friendly. As a result, I think we’ll eventually see some changes for the better. Time will tell.