Why You Can’t Get an SBA Loan

People complain that securing an SBA loan is too difficult.  There are many factors at play, here we consider the impact of a Borrower’s Business Experience on their qualifications.

In the early part of the past decade, as the economy grew at astronomical rates, the rate at which business bank loans went bad shrunk to and hovered at minuscule levels.  Once this failure rate was super low for too long, enforcement of the experience criterion became extremely lax.

SBA

This meant that people who had no manufacturing experience were sometimes being qualified for an SBA loan to acquire a manufacturing business.  As the economy tanked and failure rates skyrocketed, lenders had to backtrack and figure out why their SBA Loan portfolios were in such bad shape.

According to Ed Nance of California Bank & Trust, lenders had to review their underwriting criteria “Lenders have noted that a high percentage of ‘delinquent loans’ and ‘non-paying loans’ are with borrowers who have minimal direct management experience in the specific industry of their business.”

It is a common thought that banks are being stingy with their money.  However, they are being smarter with the amount of risk they will assume and have tightened underwriting criteria.  Again, according to Mr. Nance “Direct management experience is becoming one of the most important factors in getting an approval for an SBA loan, whether the loan is being used for purchasing a business; purchasing real estate; or for general business expansion.”  Tight enforcement of the experience criterion is certainly a good practice for lenders.

In these economic conditions lenders can not afford one more non performing loan, so the quality of the business experience is key.  Mr. Nance explains it well, “Management experience in other industries isn’t broad enough to provide the knowledge needed to combat these current tough economic times. The lenders have discovered that there is something to be said for persevering through prior ‘up and down’ periods in a specific industry. The lenders now want to see management and ownership experience in the SPECIFIC operating industry. No longer will generic management experience be enough to satisfy the requirement.”

There you have it, now you know that you need to bring considerable and Direct Industry management experience to the table to qualify for an SBA loan.  Banks are not in a position to ‘take a flyer’ on a borrower that has no proven track record.  If you work in a particular industry that you see yourself as an eventual owner in, then take an active interest in helping to grow the business and move into management by proving yourself to the owners and make sure to save for a down payment.