Debunking the Myths About SBA Loans .

The Small Business Administration has been a key player through the financial crisis. But many loan officers say small-business owners don't understand exactly how the agency's programs work—and that can hurt them when it comes time for a loan.

Here are some popular myths about the SBA, along with reality checks.
It's common to hear the SBA described as a "lender of last resort." In some ways, there's good reason for this: The agency's Office of Disaster Assistance speeds funds to borrowers in regions hammered by natural disasters, and it funds Community Development Financial Institutions that make loans to borrowers with higher-risk profiles.

But the SBA's bread and butter is facilitating loans to viable businesses. "Do businesses need to be distressed to participate in our programs? The answer is no," says Steve Smits, associate administrator for the agency's Office of Capital Access. In 2008, during the height of the financial crisis, the SBA facilitated loans to nearly 70,000 businesses—and Mr. Smits says most of them would normally have been eligible for conventional bank loans.

Borrowers often assume banks aren't taking any risks with SBA loans and don't understand why lenders would reject them. "Folks believe the funding for loans comes from the government, but it doesn't," says Erik Back, vice president at 1st Source Corp., a lender in South Bend, Ind.

Banks issue SBA loans according to government guidelines and receive some protection against losses if the borrower defaults. But "the guarantees are never 100%," Mr. Back says. Loans issued through the popular 7a program carry a guarantee between 75% and 85%, so the bank swallows up to 25% of any losses from the loan. By contrast, loans written through the SBA Express program—primarily for veterans and businesses in economically distressed areas—carry a 50% guarantee.

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Sales of Small Firms Are Up

More small-business owners sold their companies in the second quarter, but there's gloom surrounding the transactions.

Sales of businesses with roughly $350,000 in annual revenue rose 8% from a year earlier, reports BizBuySell.com, an online marketplace for small-business acquisitions in San Francisco. The increase marks the third year-over-year quarterly gain in a row, with brokers nationwide reporting similar gains.

Yet the growth isn't indicative of significant improvements in business performance or bank-lending volume. Instead, the main driving force is the acceptance among owners that their businesses are no longer worth what they once were. Many sellers cut their asking prices and agreed to finance a significant portion of the deals themselves.

"Sellers are finally starting to come to grips with the fact that it's not 2007," says Stephen Wain, president of Calder Associates Inc., a brokerage in Tinton Falls, N.J. He adds that the firm has completed twice as many deals so far this year as it had in the first half of last year.

According to BizBuySell.com, owners listed a median asking price of $239,000 in the second quarter, down from $249,000 a year earlier. For businesses sold in the quarter, the median selling price was $150,000, down from $155,000.

"People are getting more realistic," agrees A.J. Caro, chief executive officer of Bridge Business & Property Brokers Inc., a national brokerage based in Long Island, N.Y. Small-business sales are up 35% from a year ago, he says, and he is looking to add about 10 more brokers to his current staff of 25.

Some sellers have simply reached their breaking point. "People can only sit on the sidelines for so long," says Robert Bourgeois, chief executive of Sunbelt of Louisiana. The brokerage franchise has sold 21 small businesses throughout the Bayou State so far this year, nearly as many as in all of 2010.
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