June 30, 2022

5 Common Misconceptions About SBA Loans Versus the Actual Truth

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5 Common Misconceptions About SBA Loans Versus the Actual Truth

Unconventional Acquisitions

June 30, 2022

Our friends Paul and Mary are a couple who bought a couple of laundromats. They were able to pull in some SBA financing for their second laundromat deal.

Now, some people will tell you that you can’t finance a laundromat with an SBA loan, but among other misconceptions about SBA lending, that one’s not always true either.

There’s tons of misinformation out there surrounding SBA loans and how they work. 

Some of these are related to criteria and income standards, others to paybacks and the overall cost of these loans. But in the 2 years we’ve helped people buy businesses, we’ve realized certain misconceptions pop up more frequently than others.

This is where we set the record straight.

Misconception #1: ‘SBA loans take too long’

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Truth: On average, many lenders close out loan applications within 45 days—provided real estate isn’t involved.

It’s easy to see why many applicants view the process as never-ending. After all, the endless documentation, gathering, and analysis can weigh even the best of us down. But if you work with an SBA-preferred lender, you’ll find the process to be a lot faster.

Not all lenders are created equal. All SBA-preferred lenders are motivated to move quickly to closure. This often shaves 3-5 weeks off the entire process.

Conversely, if you were to go the distance alone or through a small bank trying to figure things out as they go, you can expect to spend twice as long in the pipeline.

In summary?

Know who you are working with. Work with the right folks. And have your documents ready.

If the SBA was always going to be your financing option, then it’s a good idea to preemptively ask your seller for these documents to save time:

  • Historical EBITDA
  • 3-year tax returns
  • Current year financials, preferably as late as September

Misconception #2: ‘The premium rates on SBA loans are unpayable’


At a 6% premium rate, the SBA 7(A) is one of the most affordable business loans you’ll ever see. And while that figure is the norm with the top 25% of SBA-preferred lenders, select regional banks even offer rates as low as 4.75%.

There’s no other conventional loan that offers a 10-year amortization to purchase a non-real estate asset. The combination of a longer amortization—which equals lower monthly payments—and its zero-prepaid penalty make it possible for the average borrower to repay in 3-5 years, i.e. half the time.

With this much leeway, it’s a no-brainer to say that SBA 7(A) is the most advantageous debt instrument with which to purchase a business. 

Misconception #3: ‘SBA loans require a personal guarantee’

Truth: Under normal circumstances, nobody needs $1M worth of collateral before they can get a $1M loan.

If an acquisition cannot be liquidated by the bank in the instance of a default, the lender will enact a secondary lien on any real estate the borrower may have 20% or more equity in.

In simple words, If you don’t have any real estate, you can still potentially qualify for an SBA loan. But the riskier the deal, the more your bank will look for mitigants.

Misconception #4: ‘I can’t stack financing options if an SBA loan is in the mix’

Truth: It’s no secret that the SBA’s borrowing capacity maxes out at $5M per borrower. And while that’s generous financing for those starting out, chances are you’ll start buying businesses 2x that limit by your 10th deal.

Since an SBA loan won’t go all the way on these enormous purchase prices, it’s possible to augment your loan with other financing options. Whether it’s seller financing, raising a fund…you name it. They are all on the cards.

Acquisition veterans also tend to use the same lender for all their deals. Why?

Because they would already have existing liens on your assets. Plus, they are more likely to do business with you again if you positively serviced your former debts.

Misconception #5: ‘My debt vanishes if I pass away before paying them off’

Truth: The SBA requires that borrowers take out a life insurance policy that assigns a loss payment to the bank. This way, the principal amount of the loan can be recovered even after they passed away.

A general rule of thumb is to use the same policy as the current owner of the business.

Hopefully, we have helped eliminate some of these silly excuses for not accessing millions in capital to get some deals done and start building your wealth. If you want to learn more about SBA lending, take a look at this hour-long training we held with Joe McAleer from MultiFunding during one of our Mastermind calls.

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