Over the past couple of years, I have spoken to over 300 SBA lenders. From each of these conversations, I have gained a better understanding of what differentiates one financial institution from another and how each lender identifies and goes after their target market. Though these conversations were intriguing, two points were consistently brought up:
- Educating small business owners and buyers of small businesses about SBA loans. Covered in my previous blog post.
- Being prepared for the SBA loan process.
This article will address point number two; acting as a step-by-step guide to obtain an SBA loan.
How to Obtain an SBA Loan
For illustration purposes, I will use the story of a previous client we will name Mary. Mary owned and operated a bookkeeping business. Very few people in this world shared the same passion and fulfillment as Mary, especially for a bookkeeping business. One day, Mary came to me with an idea of purchasing a bookkeeping business in a neighboring community. Her excitement of expanding her business was soon followed by questions. How should I go about structuring the acquisition, what is the best way to integrate and transition existing clients, how am I going to finance this acquisition, etc.
As Mary and I addressed her questions, I presented the idea of financing the acquisition through an SBA loan. From my perspective, I explained to Mary the 4-step process for obtaining an SBA loan.
These steps are:
- Qualifying for an SBA Loan
- Selecting an SBA Lender
- Gathering the Necessary Documents
- Completing the Required SBA Forms
Let’s look at these steps in more detail.
1. Qualifying for an SBA Loan
Prior to securing SBA financing, Mary and I discussed whether or not she qualified. The SBA documents the qualifications for a borrower. Not only is it worthwhile to consider the SBA’s qualifications but the qualifications of the lender as well. Each bank has their own set of guidelines to follow.
Mary and I considered her eligibility requirements for an SBA 7(a) loan. SBA 7(a) loans may be used for various reasons such as funding working capital requirements, purchasing another business or purchasing commercial real estate.
Primary SBA Loan Qualifications
A credit score of at least 680 for all primary business owners.
10 percent or more depending on the purpose of the loan.
The more business collateral and/or personal collateral brought to the table, the easier the loan process will be.
Operating Time as a Business:
Two or more years of operating experience are required.
A debt service coverage ratio of 1.25x.
Business Credit Background:
No delinquencies or defaults on debt obligations to the U.S. government.
Nature of Business:
The business operates as a for-profit entity and is incorporated in the United States. In addition, the business is engaged in an industry that is eligible.
2. Selecting an SBA Lender
Upon discussing the qualifications as documented above, Mary and I looked into the many SBA lenders available. I have worked with direct lenders and loan brokers in the past but Mary and I focused on Direct Lenders, these include banks, credit unions, and non-bank SBA lenders. One of the most covenanted designations for a direct lender is that of the SBA Preferred Lenders Program (PLP). PLP lenders are able to process SBA loans more quickly than that of the Certified Lenders Program (CLP).
When vetting SBA lenders, Mary and I inquired and narrowed a list of potential lenders:
- Lender’s total SBA volume and industries worked with
- Lender’s average SBA loan size
- Whether or not the Lender is classified as a PLP
- Standard turnaround time for pre-approval and funding
- Funding terms
At the end of the day, Mary selected an SBA lender she looked to as an advisor to the business and not necessarily a lender.Gathering the Necessary Documents
Gathering the necessary documents for the purpose of completing the application is crucial and potentially timely. Mary happened to be organized and prepared with the following documents
- 3 years of historical personal tax returns
- 3 years of historical business tax returns
- Interim balance sheet and income statement for the business
- Projected financial statements (one to two years if applicable)
- Purchase agreement
More documents maybe required, but I have included the main documents Mary and I provided to the lender
3. Completing the Required SBA Forms
SBA loan applications vary by lender, but they typically request basic information about the nature of the business and the intended purpose of the loan. SBA loans require the following forms:
- SBA Form 1919 – Borrower Information Form
- SBA Form 912 – Statement of Personal History
- SBA Form 413 – Personal Financial Statements
- SBA Form 159 – Fee Disclosure Form and Compensation Agreement
- This form was required because Mary had hired me to assist with the loan application. The form details how much was paid for the services rendered.
4. SBA Loan Application Timeline
Like any loan process, the SBA loan process is detailed. However, over the past decade the ability for lenders to close SBA loans in as few as 30 days is remarkable. Mary and I were able to secure an SBA loan in 31 days. The SBA loan timeline from start to finish looked like the following:
- Preparation of SBA Application – This included the completion of the above named 4 steps which took approximately a week.
- Letter of Intent – Upon completion of the application, the lender provided a letter of intent, documenting how much Mary qualified for and terms of the loan. Mary submitted a signed letter of intent along with a small deposit.
- Underwriting – The underwriting process varies by business and lender. In my experience, underwriting takes between 2 to 3 weeks based on the need for further verification of financials and plans for loan proceeds. Mary’s experience with the underwriting process took about two weeks.
- Commitment Letter – Upon completion of the underwriting, a commitment letter outlining the terms of the loan and remaining steps were presented. Mary completed this step upon receiving the commitment letter. An additional deposit was required by Mary at this point.This deposit is typically $5,000 or 5 percent of the loan, and counts against the down payment.
- Closing – During the closing of the loan, terms are finalized and loan agreements are signed by each party. This process took Mary less than a week. Mary was required to pay closing costs and SBA guarantee fees. The lender in return disbursed the loan proceeds.
The SBA loan process may seem tedious, but if prepared, the process can be much faster. Working with an experienced SBA lender can make this process much easier. Because SBA loans represent a government program, small business owners, like Mary, know beforehand how to prepare and secure a loan quickly.
With the acquisition of the bookkeeping business, Mary was on her way to building a more sustainable business model. My experience with Mary provided a great learning experience about the SBA loan process, but it also gave me a clearer picture of the mission of the SBA – helping small businesses to succeed.
SBA loans provide a great source of financing for small companies. If there is a possibility to grow one’s business with the assistance of an SBA loan, consider and look into an SBA loan. If interested, feel free to email me at email@example.com. I am happy to be an advisor or answer any questions regarding SBA loans.