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That’s right, banks hate giving SBA loans to security guard companies and most other companies. Why do I say that? Well, let me start off by saying that I’ve been an entrepreneur on and off for nearly three decades. I’ve had businesses ranging from lawn care services to software development and everything in between. Over those three decades, I’ve met hundreds, if not thousands, of entrepreneurs across every possible industry. Out of all of those entrepreneurs, the one thing I can confidently say was a common theme amongst almost all of them was that each struggled with financing their companies. There isn’t a single type of financing that I haven’t seen or used, including merchant loans, factoring, maxing out credit cards, etc. The funny thing is that out of all of those entrepreneurs, I can count on one hand how many of them had secured SBA Loans (Small Business Administration Loans). That was especially true for security guard company SBA loans.
My Journey with SBA Loans: A Surprising Discovery
When I started my security company, my local SCORE office was thoroughly convinced that based on our business plan, experience, and contacts we wouldn’t have a problem securing an SBA loan. The funny thing is that EVERY bank that we went, to effectively skirted right past the SBA application and shuttled us directly into a traditional loan. That perplexed me because when doing an SBA loan, the SBA guarantees a portion of these loans. That guarantee reduces the risk for the bank, which SHOULD make it easier for small businesses to obtain funding for working capital, expansion, purchasing equipment, or refinancing debt. However, none of the banks were interested in us applying through the SBA Loan program.
Fast forward 10 years to my current company, I found myself at another bank looking to apply for an SBA loan through Chase. Before I could barely get past saying SBA, the banker was briefing me on Chase’s other loan programs. Again, I was perplexed. As fate would have it, I ended up talking with a banker from a smaller regional bank, and he let me in on a little secret that is not known outside of banking circles, and that secret is “Banks don’t believe that SBA loans are worth the time and effort.” What?!?!?
The banker explained that there are three (3) main reasons banks hate SBA loans.
Why Banks Avoid SBA Loans for Security Guard Companies
First, the application process is too complex for the bank. The process for securing an SBA loan is more complicated and time-consuming than the underwriting process for traditional loans. It involves extensive paperwork, documentation, and compliance with strict SBA guidelines, which can be cumbersome for the bank and the borrower. To top it off, most banks don’t have personnel who know the proper procedure for filing loan applications with the SBA. And guess what? If the application is not filled out correctly, any request for reimbursement in the event of a loan default will be denied.
Second, SBA loans typically take longer to process than conventional loans because of the additional layers of review and approval. Because the government loves red tape, this is a deterrent to banks that want to maintain quicker loan processing times.
Lastly, if the loan goes into default, the bank can’t just contact the SBA and request reimbursement because the government loves red tape. The bank has to go through all the normal steps of trying to collect the debt. That process includes trying to foreclose on property, equipment, or other assets pledged as collateral and taking legal action to collect on personal guarantees.
Once the bank has exhausted all recovery efforts, it can submit a “Guarantee Purchase Demand” to the SBA to reimburse the guaranteed portion of the loan. This claim includes detailed documentation of the loan history, actions taken to recover funds, and liquidation efforts. The SBA then reviews the claim to ensure the lender followed all guidelines, including proper loan servicing and recovery efforts. If all the forms are correctly filled out, the SBA approves the claim, and the bank is reimbursed for the guaranteed portion, typically between 50-90% of the loan. If non-compliance is found in any of that process, the SBA may reduce or deny the guarantee payment.
This process can take years to complete, and banks don’t want to spend the time dealing with the federal government, so most banks just plain hate making SBA loans.
Solutions to the SBA Loan Challenge
It’s sad to say that one of the tools championed to entrepreneurs amounts to nothing more than a myth. With that being said, one of the things that I hate most is when people bring me a problem without a corresponding solution or two. So, let me share a couple of solutions that I’ve seen work to some degree.
1. Finding the Right Bank for SBA Loans: A Rare but Valuable Resource
Even though most large banks, or banks in general, hate SBA loans, there are banks out there that are equipped with the personnel and expertise to help you facilitate an SBA loan. Unfortunately, they are few and far between, so you may have to search and call around a bit. One bank that I searched and found was American Bank located here in Louisiana. They are just one example of a local bank with an SBA loan department and are eager to speak with small business owners. I’m sure there are similar banks in your area as well.
2. Engaging Elected Officials
Solution number 2, although it might not be quick, is to speak with your elected federal officials about the myth of the SBA loan. I was at a business round table with our local US Representative, Garret Graves, discussing the obstacles to success for entrepreneurs. One of the things that he advised the entrepreneurs in the room to do if they needed funding was to pursue an SBA loan. There were audible gasps of frustration from almost every entrepreneur in the room, and Representative Graves was obviously confused by everyone’s response.
I took the opportunity to explain the difficulties and reasoning behind most business owners’ frustration with Small Business Administration Loans. I could tell by the look on his face that he had no idea that SBA loans weren’t relatively “easy” to get for most business owners. After a brief exchange, the group moved onto other topics.
After the symposium, Representative Graves sought me out and asked more questions about the SBA loan experience and expressed that neither he nor many of the members of Congress had any idea that the program wasn’t supplying the financial resources needed for business owners. Initially, his statement was hard to believe, but it makes perfect sense when I think about how difficult it is to work with the federal government (the next story will be about my experience getting on the GSA schedule…sheesh).
Closing Thoughts On Navigating Small Business Administration Loans
In conclusion, whether you own a security guard company or any other company and are looking for more favorable financial instruments, I encourage you to find local banks with Small Business Administration Loan departments and start talking to your elected officials about the inadequacies of the elusive SBA loan.
Have you had better luck getting an SBA loan? If so, what was your experience like? Do you have any tips? Please leave comments or suggestions, as they may help other entrepreneurs.
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