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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