If you are in business for yourself then you certainly understand the importance of working capital. Getting that capital, however, isn't as cut and dry as it may seem. Traditional bank loans nowadays tend to have impossibly high standards and especially if you're a newer company or perhaps your business credit history isn't stellar, you're probably looking at rejection. This is where you might consider going the SBA loan route. If your collateral and cash flow aren't quite strong enough for more traditional financing products, an SBA loan might provide the hope that you need.
We wanted to share with you an overview of what is involved as far as the SBA loan underwriting and approval process; this way you're better informed going in.
Understanding SBA Loans
Basically, this is a business loan which is backed in part by the U.S. Small Business Administration; this way, the banks have less of a risk in loaning to small businesses because if there is a problem as far as repayment, the SBA will then step in.
When it comes to business financing, SBA loans are among the most popular. Rates tend to be lower, the down payment required is also lower, not to mention the repayment terms are more favorable. And if you're a business just starting out, this can make a huge difference in terms of your available cash flow and ultimately, your bottom line.
If you do decide to pursue an SBA loan, keep in mind you had to have been turned down by a bank previously. And while the terms are more lenient, they do like to see collateral available as far as repayment purposes. This can be in the form of real estate or other such assets—not just cash. It's important to note too that with an SBA loan you will have to sign a personal guarantee.
When Lenders Underwrite SBA Loans
Underwriting is what happens as the lender goes through and evaluates your application. Because they are working with the SBA, there is quite a bit of paperwork involved with the underwriting process, and this is why these loans can take some time to reach approval. Underwriting is basically the bank's way of determining if you're worth the risk.
The SBA underwriters are tasked with the following:
Evaluating how much of a risk you pose to the lending institution.
Figuring out how to minimize loss should you default.
Reduce analyzing costs where applicable.
Upon deciding on an SBA loan, there are generally 5 steps taken when it comes to applying for and underwriting the potential loan.
1. Do Your Homework
You first need to visit the SBA's website. This will give you access to participating lenders. Look at the various lenders, find one that seems a fit with your business and industry. Do your due diligence here. Some allow you to fill out an online application, some you may have to talk to via phone. Almost all of them will ask questions such as the number of funds you need, use of funds, personal credit history, and years in business.
2. Check Eligibility Requirements
Yes, they are determining if you're a suitable candidate for a loan, but you're also looking into them as well. As far as what type of qualifications SBA lenders have, most will require 2+ years in operation, a credit score over 650, and annual revenue of 75k+. A knowledgeable SBA provider should be able to show you the loan programs that best suit your business and your needs.
3. Provide Documents
Again, with an SBA loan, there is quite a bit of paperwork involved, which means a lot of documentation on your end. Among others: license, tax returns, bank statements, and a voided check. They could also ask for any number of things that help paint a picture of your company's financial past and present. This could potentially include:
- Business plan
- Hopefully, you have one that you've been updating as the years' progress. This is a comprehensive snapshot of your company.
- Financial statements
- Such might entail profit and loss records, cash flow statement, and payroll records.
4. Choose the Type of SBA Loan
This will depend on the type of business and the potential use of funds.
The most common SBA programs include:
7(a/) Loan
With rates from 7-9% and repayment terms that can be between 7 and 25 years, this is a popular option. Uses for this type of loan are generally relegated to expanding, purchasing equipment or refinancing current debt.
504 Loan (Certified Development Company loan or CDC loan/)
The 504 loan is used for real estate purchases. It can also be applied to improvements on buildings or new construction. Repayment terms range from ten to 25 years and have a tax rate of 5%. With this program, you will have to put ten percent down.
SBA Export Loan
If you're USA based and are a central exporter then this loan is an option for you. You can finance supplier purchases, inventory or even the production of goods. With this program, the SBA guarantees up to 90% of the loan value as a way of trying to encourage more businesses to take advantage of the program.
5. Receiving Your Offer
As noted, SBA loans do tend to take longer; that said, it could be up to 90 days for approval and then up to 6 months in the case of a 504 loan. Funding timeline varies depending on the program—most are within thirty days, however.
What to Expect…
While there is a lot of paperwork and it can take longer, it really isn't overly complicated. The lender and the SBA just both want to ensure that your company is a safe bet and that all your ducks are in a row upon applying for an SBA loan. Weighing the risks is what the underwriting process is all about. The more organized you can be prior to applying, the better off. So get everything together, have documentation ready to go. Hopefully, your underwriting and approval process will take only thirty days or possibly less.
At First Union, one of the loans we offer is the SBA loan. If you are in need of funding or have any questions, please call today!