The Three Deadly Pitfalls of Small Business Administration (SBA) Borrowing

1.     Blanket Liens

The general procedure on any SBA guaranteed loan is to require a blanket lien on all the assets of the business. A UCC-1 Lien would be perfected on all your tangible assets which include all your equipment and all your accounts receivable. What this means to you is the blanket lien on your account receivables prevents your company from using current and future receivables as collateral no matter how large the growth is in your business. Therefore, as a successful business owner, you would be constrained by this blanket lien from future borrowing.  This is not a logical approach to helping any business.

The lien on all your equipment can create a limiting effect on your ability to borrow when purchasing additional business equipment. Remember when you originally borrowed the money you gave a blanket lien on all your company’s equipment; meaning if you purchase any additional business equipment with cash the bank and the SBA now have a lien on your newly purchased equipment via the blanket lien. To circumvent a blanket lien, create a purchase money lien through your lender.  The lender provides funds for the equipment and pays the seller directly from the loan proceeds.

2.     Sale of Guarantees 

Banks sell the guaranteed portion of your SBA loan as a security into the large and active SBA guarantee loan market.  This market is similar to the home mortgage market and someone who is not your bank holds the guaranteed portion of your loan. The difference between the consumer mortgage loan market and the SBA market is that as a consumer you are notified of the new lender that has purchased your entire mortgage. In the SBA security program your bank continues to service your SBA loan keeping the unguaranteed portion of the loan and services the guaranteed portion of your loan for the purchaser.

If the bank wants to buy back the guaranteed portion of a loan, in many situations the SBA Guarantee security market owner will require a large premium. Many banks will not repurchase the guarantee under those circumstances, and the originating bank is no longer willing to help its client because the largest part of the original loan is no longer the banks and they have no control over it; the bank cannot change anything about the original loan without repurchasing the guaranteed portion of the loan.

It’s important that if you’re considering an SBA loan from a larger bank, find out if they intend to sell the guarantee. If it turns out that generally they do, ask them not to sell yours. That way, if you ever need to adjust or renegotiate the loan, you won’t have to track down the current owner, and you may be able to avoid some fees as well.

3.     Too Big to Fail Banks 

In most “Too Big to Fail” banks, the originating loan officer is not the servicing officer to the borrower. Most of the nationwide bank SBA programs have calling officers who pass the underwriting to the SBA loan plant where the loan is closed and the plant services the customer.  As previously stated the calling officer and the bank lose their ability to help the customer because the SBA loan plant/bank sold the guaranteed portion.

You can try to see if the bank will let your originating officer stay on to service your business. Many large banks may be unwilling to accommodate this request, however, it’s worth discussing with them.

If you are intent on getting an SBA loan from a large institution, make sure to discuss and try to negotiate the following points:

• Ask for the blanket lien to not cover your account receivables and only currently owned equipment.
• Find out if the bank sells the guarantee.  If they do, ask they not sell yours.
• Make sure the originating officer will service your business at the bank.
• Have the bank provide these stipulations to you in writing.

Of course, the easier option is to get an SBA loan through the Business Bank of Texas, where we make sure to honor our relationships with our customers. Our SBA process is designed to provide businesses with favorable terms that run counter to what large institutions offer. Instead of traditional liens, we offer purchase liens. We also never sell your guarantee. This way if you need to modify it later on, we still own it and are free to do so if necessary. Additionally, the officer that signs you up for an SBA loan will continue to be your main contact at the bank.

We go the extra mile for our customers, because it’s how we’d want to be treated, and it’s the right thing to do. We think you’ll agree.