With the end of the Paycheck Protection Program on May 31, 2021, a number of small business owners have been asking and thinking about other U. S. Small Business Administration (SBA) loan programs, and it is perhaps a propitious moment to remember why SBA loans are so attractive to small business owners, how they reduce lender risk, and why that is beneficial for a loan applicant.
Generally speaking, SBA-guaranteed loans are attractive to small business owners because they have longer terms and lower down payment requirements than conventional loan products. Further, SBA-guaranteed loans have capped interest rates and no balloon payments. The loans are made through a private lender and then guaranteed by the SBA. That guarantee lowers the lender’s risk which allows them to approve borrowers where they may not have been able to extend credit otherwise.
Small, for-profit businesses are eligible for an SBA-guaranteed loan. Each lending scenario rests on its own merit and the lender’s criteria for extending credit. Just as with any conventional loan product, SBA participating lenders evaluate the borrower’s ability to repay the loan. The credit score is a key indicator of the borrower’s credit history. A low score would be a weakness while a high score would be a strength. It’s important to keep in mind that you have the option to “shop” lenders and find loan terms that best benefit your business. Along that same line, even if one lender declines the loan, another lender could approve it. SBA works with a large network of lenders and so business owners have many options, to include large traditional banks, regional banks, and smaller community-based lenders. Your local SBA District Office can provide you with a list of participating lenders in your area. You can also use SBA’s on-line lender matching tool to connect with SBA-approved community development financial institutions (CDFI) and small lenders from all over the country at www.sba.gov/lendermatch. Many business owners find it helpful to meet with a business advisor from one of SBA’s business counseling resource partner organizations as they research their financing options. You can find a business advisor near you by using our locator tool at www.sba.gov/local. These partner advisors can assist the businesses owner in any aspect related to applying for financing, be it identifying lenders, preparing a strong loan package or even building or repairing credit if that is a concern. As our partners, these advisors offer their services at low or no cost and are a great resource to any business owner looking to start or grow their business.
The application process is managed by the participant lender from start to finish. The exact paperwork and forms required is determined by the lender. Generally speaking, most lenders will ask for your business plan, tax returns and financial statements (or financial projections for a new company). Advisors with our SBA small business counseling partners, the SCORE Association, the Small Business Development Center or a Women’s Business Center, can assist with preparing these documents and the loan package. These services are free of charge.
A question often asked by a potential borrower is “how long does the process of applying for an SBA loan take” or “what is the average wait time before applicants receive funding after the approval?” The easy answer is that it depends on what authority the bank has with SBA and whether they process a loan using their delegated authority. If they use delegated authority, they generally receive the SBA approval instantly. While there is no guaranteed timeline, generally speaking, borrowers report completing the full process anywhere from two weeks to one month. Quicker processing time usually occurs when a lender is an SBA-preferred lender and that is why there is an advantage to working with them. When a lender has Preferred Lender status, the lender has authority granted by SBA to make final credit decisions on SBA-guaranteed loans. Non-preferred lenders must submit the loans directly to the SBA for approval, which may make the process longer and can potentially be a timing issue.
Borrowers also often want to know the most common reason an SBA loan application is rejected. Many times, it is because of insufficient or incomplete application information or issues of character, such as a criminal record or bankruptcy. It is important to remember that even with the SBA guarantee, the lender may require the borrower to provide a down payment or additional collateral because the SBA guarantee does not eliminate risk, it merely reduces it. The exact terms of what is required is based on the overall risk of the transaction. Always remember that personal guarantees also apply, and the borrower does have an obligation for repayment.
To learn more about how SBA loans can benefit your small business, please join us for our monthly SBA Arizona Virtual Loan Clinic, next offered on Wednesday, August 4th at 9am. We will discuss financing options, general loan requirements and tips for preparing a successful loan application. No registration is necessary. Webinar log-in information is at www.sba.gov/az
In addition to our website, please follow us on Twitter @sba_arizona and view our Resource Guide at www.sba.gov/document/support-arizona-district-resource-guide for further information.
Robert J. Blaney has served as the district director of the U.S. Small Business Administration for the State of Arizona since 1998. His experience includes work as a federal agent, police officer, vice-president of an insurance brokerage and district director for the late Congressman Jack Kemp.
About the U.S. Small Business Administration
The U.S. Small Business Administration makes the American dream of business ownership a reality. As the only go-to resource and voice for small businesses backed by the strength of the federal government, the SBA empowers entrepreneurs and small business owners with the resources and support they need to start, grow or expand their businesses, or recover from a declared disaster. It delivers services through an extensive network of SBA field offices and partnerships with public and private organizations. To learn more, visit www.sba.gov.