SBA Loan Program for Employee Trust Companies: Dangers

The dangers associated with SBA loan programs primarily concern the required guarantees small businesses must make, the lengthy amount of time it takes to actually get the loan and the high rates that can and do appear from lenders. Each of these factors can create distinct dangers for employee trust companies, in particular, because of their dispersed employee stock ownership.

Bad Timing

It is an all too common feature of SBA loans that they can take an excessive amount of time to process and get distributed. One reason for this is that attempting to access an SBA loan program requires a two-tiered application process. You must first apply to the lender and then subsequently apply to the SBA for the guarantee. Forgetting the fact that the SBA issues a mountain of paperwork in the first place, this two-tiered process results in you waiting for two approvals instead of only one. Moreover, the actual disbursement process can lead to further delays and documentation. This is because the SBA does not make loans directly, it merely guarantees them against default.

The resulting waiting periods are potential danger zones for small businesses. For example, a good deal might be time sensitive and pass by or get picked up by a rival business because the loan took so long in arriving. Furthermore, if a small business is attempting to finance a deal with changing costs, it's likely that loan delays will only increase the costs involved.

Required Guarantee

One particular aspect of SBA loan programs, which can represent a danger to most employee stock ownership companies, is the guarantee that the SBA requires of all principle owners. That is, SBA loan programs require a guarantee from all principle owners who hold 20% or more of the small business. This guarantee carries with it a lien on the borrowers property and on the property of their spouses. So, in those cases where a small business defaults on their loan, the principle owner's properties are seized. They are not seized by the lender as it has already been guaranteed payment from the SBA.  Rather, the property is seized by the SBA and used to pay off the principle of the loan.

Employee stock ownership companies not only need to worry about their personal property acting as a guarantee to the SBA, but they must also pay a guarantee fee. This fee is 2.75% of 75% of the principle loan balance, paid directly to the SBA. Such guarantees seem only to draw more principle funds out of the small business loan being sought by the respective company.

Higher Rates

While the SBA can place caps on the interest rates that usually accompany commercial lending, this does not stop certain lenders from charging higher rates for loans that are guaranteed by the SBA. These higher rates serve only to further drain the already depleting funds supplied in the small business loan, especially if the company opted for financing the processing fees and closing costs. Depleting funds usually equals danger for the small business.