Clients typically consider an SBA loan along the same lines as a mortgage or other debt product used to purchase a large asset, and are under the notion that all SBA lenders are created equal and the only concern should be interest rates. Nothing could be further from the truth, and these borrowers typically end up pledging more collateral then what’s required by the SBA and may also be exposing their spouse to unneeded loan exposure and guarantees. The SBA SOP’s (Standard Operating Procedures) outline the minimum requirements to secure the SBA’s guaranty for a specific loan request. The lender must meet all SOP guidelines and follow all SBA procedures to be able to rely on the SBA’s guaranty in the future. They are permitted to go above and beyond the guidelines at any time, and many fixed rate lenders do.
- The loan term – This can be shortened be any length term up to the SBA’s maximum
- Collateral – This can be all their owned real estate and cash accounts, even though the rule does not demand it
- Required guarantors – A lender can require anyone who they believe to be involved in the operation of the business, or just injecting money, to be full guarantors on the loan
The most concerning part of these practices from fixed rate lenders is that most borrowers are unaware that these lender rules could possibly be adjusted, left out of the loan, or in some other way used to protect a borrower from extra, unneeded risk moving forward. As an example, one of our recent clients owned eight rental properties and once we determined that only three were positioned where we had to place liens, we explained how we could protect his other five homes and allow him to use those as collateral to purchase additional rental properties in the future. He was explained to by a fixed rate lender that they would be presenting the same scenario with only the three properties taken, but just days before the closing he was then explained to that they needed to take more than just the three properties and possibly up to all eight. Being over six weeks into the transaction, there was no time to begin the process over and he was forced then to pledge more than what was originally discussed. Unfortunately, this scenario happens much more than you might expect and we witness it all over the country. We do not allow anything like that to happen at our firm as our relationship with our lenders is much too valuable to risk by using such practices.