I have seen enough SBA loans to ask and ponder the following questions.

If any  of these issues apply to you we had best talk…soon.

1. I cannot imagine how or why the SBA will guaranty loans that are far too large for the borrower to service under the most optimistic of  circumstance, thus default is virtually guaranteed. Its just a matter of when. I believe that like so many other government institutions and agencies, they need to give out their cash or get less next round, thus they have great incentive to accept questionable loans requests.

2. Many loans I see are simply ill conceived as the business plan is grossly deficient and cannot work, let alone support the debt service, yet because of the SBA guaranty, the banks agree to make loans that should not have been made in the first place. Interestingly the SBA has this as its mission…to support borrowers who do not qualify in the traditional marketplace and thus to make certain these people get loans the SBA guarantees the debt. So they acknowledge that they are starting off with unacceptable high risk.

3. Be wary of an offer to give you more money then you have asked for, much more, with the banker stating ‘you qualify for another few hundred thousand, why not take it? If the loan ws not guaranteed by the SBA there is no way you wold ever hear these word, but without any substantial risk, the banks have no problem giving more then you need. Sounds great until you have to begin servicing the debt and gag on the payments. Frequently the reason for default.

What do we expect other then a higher rate of failure. This may be acceptable or even an appropriate objective, providing high risk loans, but to add fuel to the fire by over lending, and then upon default tightening the noose saying you had your one shot and now we will extract what we can and leave you on the road side, is not an acceptable conclusion.

This is not good and is backfiring now that the economy is being challenged. Apparently, as long as the banks have both the husband and wife sign the guaranty personally, putting their home up for collateral, combined with the SBA guaranty, the bank feels they have so little exposure they would agree to lend to anyone, any amount, for any purpose, the more the better. No problem, they are covered. Thus they rationalize excessive lending and the SBA goes along with it believing that the bank is underwriting effectively and prudently…not so.

In essence we have lost the very important underwriting filter where loans are closely examined and carefully reviewed so those that pass stand a fair chance of success. The result is high risk inexperienced business owners and now higher risk inexperienced borrowers, are borrowing too much money for questionable business plans and are facing a disaster waiting to happen.

It may be ok if the borrower was not held personally responsible with their homes at risk, but that is not the fact, easy borrowing, big risk, predictable failure, personal guaranty called.

I actually wonder if these issues are capable of supporting a lender liability suit, as some of the loans I see that are in default are very questionable, and should not have been made and now the borrower is poised to loose everything they have, home included. What was really accomplished?

Of course there is the second issue of running out of cash and needing more to finish a project, or turn the corner into profitability and increased gross revenue, or a number of traditional modifications to the loan typically available to traditional borrowers but unavailable to SBA borrowers.

Modification of the loan appears in most  SBA guaranteed situations to be unavailable thus putting huge pressure on the borrower to be right the first time, even though they may not survive early peaks and valleys of a project start up  without additional capital or other loan modifications generally available t other borrowers. Second round financing may be required as is with many traditional loans and is generally unavailable  to SBA guaranteed borrowers.

Thus I ask the question where is the fairness here?

New borrowers opening new businesses or buying existing businesses are failing at a rapid rate because neither the bank or the SBA is really doing the job correctly and while it may appear they are helping by providing requested capital in high risk situations, in all reality they are hurting the borrowers severely.

What to do about this? The prospective borrower must not rely on the bank to determine if their loan application has a reasonable likelihood of succeeding. The underwriting function plays an important role in making certain only viable potential business plans are funded.

1. Have your application for borrowing  and your business plan checked by an experienced business consultant or accountant who will determine if your assumptions and parameters are reasonable and can be achieved with the cash amount you are borrowing. You will not get additional cash to help if you run short.

2. When you see yourself heading for trouble. STOP! Ask for help, seek outside opinion, not the banks, not the SBA, but someone hired by you to do an analysis. This step is critical. Seeing the potential disaster in advance allows you to make pre-emptive decisions while they can still be effective, while you still have some cash remaining to use to support a re-engineering if necessary.

I have talked about pre-emptive workouts before in other blog entrees, and this is a perfect time to consider this strategy. Work it out before it eats you alive.

Call me if you need advice or help…I have been here on this issue for a long while and have insight into your options, which are many. 413-584-2581, ask for Norm, he will arrange a no obligation teleconference for us to explore your options.