SBA Lender “Bait and Switch” : A Nasty Practice

By Hoke - Last updated: Tuesday, October 27, 2015 - Save & Share - Leave a Comment

The SBA guarantees 75% of a Business Acquisition Loan. If the Buyer can make a 25% Cash Down Payment, in the event of a default, the Lender can collect the entire loan balance from SBA. It has no risk of cash loss. As written, the SBA program is wonderful and very helpful.

However, Lenders have discretionary leeway to make the lending standards more stringent than those mandated by SBA. One discretionary policy that creates big problems to Sellers, Buyers and Brokers are Lender internal underwriting policies that require Seller Assisted Financing. From my reckoning a majority of the banks have this internal policy. It is difficult to determine if a bank has a Seller Assisted Financing policy because when asked, the Lender’s Salesperson will make vague statements regarding Seller Assisted Financing such as  “only in some cases”, “usually not”, “only if required” etc.

One can’t really blame the Lender’s Salesperson for the vague answers because if they were forthright, they will lose a lot of sales because most sellers will not initially agree to provide Seller Assisted Financing, especially when they learn of the SBA required policy of Zero payments for the first 24 months.

What the Lender’s Salesperson does is initially avoid discussion of Seller Assisted Financing. They will issue non-binding pre-qualification letters with no mention of Seller Assisted Financing, verbal approvals and assurances everything looks great. They wait until Due Diligence is completed, escrow is opened and the forma Loan Approval underwriting process begins. About 30 – 45 days after the initial Purchase Agreement was signed a formal Loan Commitment Letter is issued by the Lender. This letter is where the surprise requirement for Seller Assisted Financing is dropped on everyone. The Lender Salesperson acts surprised and blames it on the Underwriting Dept., SBA or names some minor fault as the reason it was required. Usually the Seller Assisted Financing is 10% – 15%. They will often lower the Buyers down payment requirement even if the Buyer is fully prepared to pay a 25% Down Payment. The surprised Seller is angry and frustrated. About 75% of the time the Seller will grudgingly accept the Seller Financing because they do not want to start all over. This is what the Lender is counting on. Sometimes the frustrated Seller will let the deal blow up. Everyone starts over.

Fortunately, not all SBA Lenders engage in this deceptive practice. If the seller does not want to provide Seller Assisting Financing, the remedy is to be upfront and let the buyers know 25% Down Payment is required and no Seller Assisted Financing is available. Secondly is to deal with banks whose loan standards “Conform to SBA Requirements” not create their own more stringent loan standards. Listen carefully for vague answers and demand clarity when asking the Lender’s Representative about their Seller Assisted Financing policy.


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