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The U.S. Small Business Administration’s (SBA) 7(a) loan program is its most popular option and every year, lenders approve around $20 billion in SBA 7(a) loans. The 7(a)’s low owner-equity requirements, flexible uses, affordable rates and extended repayment terms make it a great fit for businesses.
When you and your team understand the SBA loan application process, you’re better prepared to help. In this Q&A, we look at the questions we hear most often from partnering lenders and your clients and provide answers that can proactively help your customers get to “yes!”
Questions from lenders about the SBA 7(a) loan application process
Q: What are the key steps in the SBA 7(a) loan process?
A: The steps for SBA 7(a) loans are a lot like the steps for any business loan. They include the application, underwriting, closing and servicing. You may find that SBA loans come with more comprehensive paperwork, but they follow the same general loan process as conventional business loans. The thorough nature of an SBA application is because the SBA, as a federal agency, is ultimately responsible to the U.S. taxpayers.
As the liaison between the SBA and your institution, we handle the heavy lifting to make each step easy on your team.
Q: Is there a way to prescreen applicants?
A: When you work with Prudent Lenders, you have access to our proprietary tools, including our Fast Track Assessment. You’ll start by completing an FTA request form with your potential borrower. Once you submit it to Prudent Lenders, we’ll get back to you within 48 hours. A completed FTA will determine SBA eligibility and provide information you’ll need to decide whether to move forward through the full application and underwriting process. We also identify “red flags” or areas that need be addressed, as applicable.
Q: How do we know that we’re submitting everything needed for the underwriting process?
A: Our team will send you a custom underwriting checklist for every unique application, so you and your clients know exactly what to provide. Prior to submission to the SBA, we’ll review the package to ensure that it’s complete and we’ll contact you if any additional information is needed.
Q: What does the SBA 7(a) underwriting process look like?
A: The SBA allows lenders to use their institution’s own underwriting processes. However, SBA guidelines must be followed to ensure loans are made ethically and responsibly. To that end, our team will provide you with an SBA compliant credit memo that addresses everything required in the SBA SOP – collateral analysis, cash flow analysis, credit elsewhere, affiliation, etc.
Q: How do we know when an application is ready to submit and who does it?
A: After the underwriting is completed and we’ve reviewed the loan package, we’ll contact you if any additional information is needed. Then, we’ll take care of submitting the file to the SBA on behalf of your institution. After SBA review, if there are any additional documents or modifications required, we’ll let you know.
Q: Can expansion projects be funded by the SBA 7(a) loan program and what are the equity requirements?
A: Yes. If the new entity and location have the same owner/s as the existing entity and location, then you can potentially finance up to 100% of the expansion project. However, one must perform due diligence to determine the appropriate equity amount. Often times its prudent to require an owner-equity component (typically, 10% of the project) to improve debt service and reflect an owner’s “skin” in a project. Regardless of the required equity, the analysis performed to determine the appropriate equity must be explained in the credit memo prior to SBA submission.
Questions you might hear from your clients
Q: Are personal guarantees required?
A: Yes. The SBA requires any individual or company that owns 20% or more of the applicant business, or eligible passive company (EPC), to provide their personal guarantee. Additional guarantees may be required for credit reasons.
Q: What is an eligible passive company (EPC)?
A: All SBA loan proceeds must be used to support a small business. However, when purchasing real estate, business owners sometimes want to hold the real estate title in a separate entity from the business, for liability purposes. Therefore, a new entity is formed that strictly holds title to the real estate and leases the property to the small business. The SBA created the “eligible passive company” rule to make it allowable to lend money to a realty company, so long as the underlying small business occupies the space.
Q: What collateral needs to be pledged to meet the “all available collateral test?”
A: For SBA 7(a) loans, business assets are the primary collateral, particularly assets that are funded through the SBA 7(a) loan program. However, when those aren’t enough to cover the entirety of the loan, then personal property is also required.
It’s worth noting that property that’s solely owned by a spouse who isn’t an owner or operator of the business isn’t required to be pledged. However, the property can’t be transferred just prior to the application or approvals to meet this exemption.
For example, a business owner can’t change the deed on a house to move it into a spouse’s name only, if done to meet the exemption. If, however, a spouse purchased the home they both live in several years ago and is the only person on the deed, then it’s not required to be pledged. The same is true for other types of collateral.
Q: Outside of business assets, what else is required to be pledged?
A: Both commercial real estate and fixed assets may be pledged. If these aren’t enough to cover the loan, personal real estate of the principals can be used to cover the shortfall.
Also, while the SBA requires that collateral is pledged, a lack of it can’t cause an application to be declined.
Q: Does the term of the loan need to match the lease?
A: When leasing commercial space and using SBA 7(a) funds to improve it, then the term of the loan must match the lease. For example, a loan term can be up to 10 years for a property with a 10-year lease.
Q: How much equity is required and what kinds of sources are acceptable?
A: For businesses that are in the startup phase or that are acquired, a 10% equity infusion is required. This includes businesses that have less than 12 months of revenue generation.
For SBA 7(a) loans, equity can come from many sources. With three months of account statements and other documentation as noted, these are acceptable:
- Personal cash
- Business cash
- Home-equity loans and lines of credit, which also require proof of borrowing availability, meaning that there’s enough credit available to meet the owner-equity requirement
- Gifted funds, with a gift letter
- Funds in retirement accounts
- Borrowed funds, with proof of an available source of funds to borrow and proof of the business owner’s financial capacity to pay this back along with a new SBA 7(a) loan (a copy of the note, if available, will be requested, too)
There may also be consideration for owner equity that’s already been invested in the business.
Your partner in SBA lending
The more familiar you and your team are with SBA processes and requirements, the more successful your small business lending program will be. When you work with Prudent Lenders, a lender service provider (LSP), you have one of the industry’s most experienced and knowledgeable teams on your side. We’re always available to help, so if you have additional questions or need guidance, let us know.
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