Hundreds of thousands of small business owners apply for loans from the US Small Business Administration (SBA) each year. However, small business owners should know what SBA agents and banks can and cannot do before applying. This article shares some things that small business owners should watch out for when applying for an SBA loan.
Small business owners are easy targets.
According to the SBA, over 50% of all small businesses have borrowed money in the past 5 years. And continually one of the most popular loan products we are asked about are the SBA 7a, Express, and 504 loan products.
One thing we regularly see is that many small business owners are taken advantage of by banks or brokers. With so much misbehavior and shenanigans out there, we wrote this article to outline several things that banks, and brokers cannot do to small business owners while they apply for an SBA loan.
Two reasons why banks and brokers take advantage of small business owners
The team at BRP Onesta helps small business owners start, maintain, and grow their businesses. Each year we see hundreds of small business owners who are taken advantage of for two basic reasons:
- Small business owners do not know the rules so they will do whatever is asked of them by banks or brokers.
- Brokers know that SBA loans do not pay much. That is, unless the SBA loan is for millions, merchant cash advances, equipment loans and term loans pay much better than SBA loans. Therefore, it is not uncommon for brokers to ask for up-front fees or due-diligence costs. In many cases, brokers lie to small business owners by telling them the costs are reimbursed at the closing or refundable if the loan does not fund.
Things that SBA banks and brokers would love to do but are prohibited from doing so.
Small business owners beware – these are things that small business owners we interact with typically are asked to do or participate in.
Due Diligence Costs: Due diligence costs are fees paid up front for legal fees before submitting the loan. Not only is this practice illegal,
Commissions, referral fees, broker fees: These fees are common in different loans, including equipment and real estate loans. Even Merchant Cash Advances and term loans have these structured in different ways. Banks are not allowed to charge any commissions, broker fees or referral fees. In some cases, fees can be assessed if provided using SBA Form 159.
Fees for legal services: Most banks do not charge fees for legal services unless the lender is being billed by an attorney at an hourly rate for set services.
Fees for services: This is a common issue with loan brokers who promise small business owners that they will be working on their SBA loan package for them. Sometimes these services can be approved if provided on SBA 159 (after loan approval) but up-front fees like due diligence are not allowed and illegal. If you are a small business owner and you are asked for an upfront fee, you are probably getting ripped off.
Add-On Interest is charged one time, in advance, and added to the loan balance. The amount of interest in not compounding or decreasing according to loan balance. This is not allowable. And while SBA loans do not allow for some early payback without penalty (usually because of the guarantee from SBA), SBA loan interest is based on balance remaining.
What do small business owners do to protect themselves?
It is imperative that small business owners do things to protect themselves as they apply for SBA funding. Even if small business owners do not get approved for an SBA loan, they should not be taken advantage of.
Small business support companies like BRP Onesta provide realistic, free origination on SBA and other loans. We are honest, care about the business owner, and work with the business owner to provide a pathway for funding, even if he or she is not ready.
If you would like to have free qualification review for an SBA loan, please contact us at any time. We can usually provide a pre-approval in 5 minutes.
Dr. Thomas Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.