The U.S. Small Business Administration has been supporting small business owners in the United States since its inception in 1953. Its lead program, the SBA 7(a) government-guaranteed loan program, has evolved into a very efficient and consistent loan approval process among participating SBA lenders. The most important factor to understand is that the SBA loan approval process is now a very refined template for underwriting the loan risk and loan approval decision. That means the SBA 7(a) loan approval process and time frames can now be the same, if not more efficient, than conventional bank or non-bank small business financing.
What is the SBA Loan Program?
Since its inception, the SBA loan program has generated measurable economic stimulus objectives, including favorable job growth. It has evolved into an indirect loan program whereby the small business loan recipient receives loan funds from participating banks, credit unions and licensed SBA nonbank lenders, instead of receiving loan funds directly from the government. The U.S. Government typically guarantees 75% of that loan against loss for the participating lender in good standing with the SBA.
Experienced SBA lenders, like Fidelity Bank, earn the PLP or “Preferred Lender” designation from the SBA, and they are able to approve SBA loan applications on behalf of the SBA without government intervention in the credit approval process. The program works well and fills a gap in credit availability for small businesses in the United States.
The First Steps
The first step in the loan approval process involves meeting your SBA lender and giving them enough information to evaluate your loan request for a pre-approval letter. You want to know the loan terms you can qualify for before accepting an offer by the SBA lender. The SBA lender also wants to know that the small business will accept and benefit from these loan terms before completing the full underwriting process and preparing the SBA loan application package for the borrower. Usually, your acceptance of the terms includes paying a deposit to the lender to cover the cost of underwriting, in case you don’t go through with the transaction, after the lender has completed all the work and is ready to close the loan.
Most SBA Preferred Lenders can provide a preapproval and a loan proposal letter within a week or two after you submit all the required information, including but not limited to:
• A solid Business Plan along with personal and business financial statements
• Last three years personal and business tax returns
• Completed Loan Application describing the loan request and itemizing the use of loan proceeds
• Signed authorization for credit and background investigation
• Management resumes from owners and primary managers
What Happens Next?
The borrower should allow approximately two weeks for the next step in the process: the formal underwriting procedure by the lender. The formal underwriting procedures involve assembling data from the borrower to prepare write-ups and analysis for the following five categories:
- Repayment ability – analysis of business and personal cash flow streams
- Management experience – evaluation of the owners’ expertise, experience, and education sufficient for being successful with the business
- Equity – the borrower’s level of personal cash investment is reasonably balanced against the debt provided by the lender and other small business creditors
- Credit –the borrowing company and its owners have been reasonably responsible paying other creditors
- Collateral –the level of collateral provided by the borrower is sufficient for SBA guidelines and the lender’s appetite for risk.
After formal underwriting is completed, the lender will offer you a firm commitment letter for acceptance. Upon acceptance, the loan closing process begins.
The Loan Closing Process
The loan closing process is preparing for the day when the borrower signs loan documents and the lender funds the loan for the borrower. Every small business and SBA loan application will have a long list of closing and funding requirements for the borrower and lender. These items include, but aren’t limited to, the following:
- A “note” or “promise to pay” will be signed by the borrower. The note will include the terms of the loan, or origination date, amount of the loan, interest rate, maturity date, and collateral.
- Security documents required to be signed and filed with various governmental entities to perfect a lien on the collateral for the lender.
- Insurance documents proving the lender insures the property title, collateral, and the lives and ability to work of the borrowers, to name a few.
SBA documents will include a complete SBA loan application package with the lender’s underwriting and the borrower’s authorization for background and credit checks, as well as reports from third party professionals such as real estate, business, and equipment appraisers, environmental assessment engineers, governmental permits.
Depending upon how long these third party reports take, the closing process can usually be accomplished in one to three weeks.