SBA 7(a) Loans for Construction and Renovation: If You’re a Lender, Here’s What to Expect

The U.S. Small Business Administration’s (SBA) 7(a) loan program is the agency’s primary and most popular loan program, and for good reason. With flexible uses and loan maximums up to $5 million, business owners can access financing for larger cost projects, such as real estate acquisition, construction and renovation.

When used for construction and renovation projects, 7(a) loans are administered in multiple disbursements, rather than as lump-sum payments.

In this Q&A, we asked our multiple-disbursement coordinator Shirley Cowan to help lenders understand what to expect from multiple-disbursement 7(a) loans. Shirley offers more than 20 years of experience in commercial banking and SBA multiple-disbursements—including the range of construction and renovation projects funded by them.

Here, she tells us the most common questions lenders ask about this kind of funding and highlights tips to streamline the process.

Q: Why does the SBA require multiple disbursements for some projects?

A: The multiple-disbursement model ensures contractors and vendors are paid when work is completed as agreed. This is especially important for projects that have a lot of moving parts and potential payees, like construction and renovation projects.

When we refer to “construction,” we’re typically suggesting projects that involve new work from the ground up, such as installing foundations, framing, roofing, electrical and plumbing work and siding. “Renovation” projects usually involve major repair or replacement to existing structures and mechanical systems. In both cases, the loans made are among the highest amounts the SBA guarantees. Distributing the loans over multiple payments goes a long way toward keeping major projects on track and reducing the risks associated with large loans.

Q: To be ready for disbursement requests, what documents should lenders keep on file?

A: There are some documents the SBA requires lenders to have on file for construction and renovation loans. These are collected from borrowers prior to or at closing. They include:

• Agreements that borrowers won’t order or permit any material changes to approved project plans without prior written consent from their lenders. A material change can include anything that will increase or decrease the cost of the project. For example; a discovery of asbestos during demolition would increase costs due to removal and inspection expenses. Another example may be changing a fence type from white picket to chain link.
• Performance bonds and labor material payment bonds. Please note that lenders can forego this requirement if they retain the services of a third-party construction management firm to monitor the project or have an existing internal construction management department that routinely manages similar sized non-SBA projects.
• All applicable insurance certificates for contractors carrying builder’s risk and worker’s compensation insurances.
• Copies of all final plans and project specifications.

In addition, when lenders have the following documents on file for vendors contracted for $10,000 or more of construction or renovation work, it can result in quicker disbursement approvals:

• Fully executed and signed final contracts from licensed and insured contractors, including the total price and nature of the work to be performed.
• Completed IRS W9 forms for any independent contractors.
• Completed SBA 601 forms (Agreement of Compliance forms) for contractors performing more than $10,000 of work on the project.

Q: Are there additional items needed for complete disbursement packages?

A: Yes. To be considered complete, a disbursement package includes:

• The borrower’s signed and dated “Authorization for Disbursement.” This shows the line-by-line status of the project budget by total amount disbursed and amount remaining and lists the checks or wire transfers disbursed. A new form is filled out for each fund request.
• Any applicable invoices, canceled checks and/or credit card statements.
• Completed W9s for the vendors (only the original W9 form needs to be submitted, even if the same vendor is paid multiple times over the course of a project as may be the case, for example, for a general contractor).
• Fully executed American Institute of Architects (AIA) forms for contracted work, complete with continuation sheets, as well as any proposed change orders (if applicable).
• For loans with SBA guarantees of $350,000 or more, inspection reports are used to ensure all hard-cost contracted work has been satisfactorily completed, relative to the current disbursement request or, if there are any issues, suggested reductions to the hard-cost disbursement.
• Clear title updates free of contractor or vendor liens.
• Fully executed lien waivers for any contracted work, if applicable.
• Fund-wiring instructions from the vendor(s), if payments are made electronically.
• The borrower’s physical address and phone number, so vendor and reimbursement checks can be sent via FedEx.

While some of these documents aren’t explicitly required in the SBA’s standard operating procedures, they are, in fact, industry standard. For that reason, this comprehensive list of documents is recommended and often expected, as applies to each project.

Q: Who requests a disbursement?

A: When a borrower is ready to pay a vendor, the borrower makes a disbursement request using an “Authorization for Disbursement” form and gathers any additional forms required. Lenders are then responsible for collecting the documents from borrowers.

Q: How are the packages sent to the lender?

A: The documents are gathered as loan disbursement packages wherein the borrower emails them to the lender to be reviewed for completeness and accuracy.

Q: What happens after the loan disbursement package is submitted to the lender?

A: Lenders approve disbursements when the requirements are satisfied. A completed “Authorization for Disbursement” form is typically emailed to the lender by the lender service provider for lender and borrower signatures.
We recommend that lenders allow borrowers to send the disbursement checks to their vendors directly. Although it’s not mandated by the SBA, it’s a best practice.

Q: How long does it take for a payment request to be approved?

A: Request packages that are complete and accurate are typically turned around after five business days and a successful review.

On the other hand, incomplete packages can delay disbursements and, in some cases, can result in project delays. That’s why it’s essential to ensure request packages are complete, correct and ready for review before they’re submitted.

Additional tips for lenders

• Ensure your internal team understands the multiple-disbursement process so they can clearly communicate it to borrowers. With everyone working from the same set of expectations, the process runs far smoother.
• Keep copies of everything for each disbursement and save them in your loan folders, even if they’re not explicitly required in the SBA guidelines and even if they seem insignificant or minor. Copy all checks, wire confirmations and signed disbursement authorizations and be sure to copy and upload overnight-delivery labels like FedEx and UPS labels.
• Prior to releasing loan funds, process any needed reallocation using SBA Form 327. Re-allocations may occur when there are overages due to cost savings as a project progresses or, conversely, if there are shortfalls due to unexpected costs.
• We also recommend that lenders set up spreadsheets so they can track multiple contractors and contracts, disbursement details, loan balances, final disbursement requirements and all other details related to the overall project. Taking this step early on organizes the process throughout the life of each loan.

We’re here when you need help

If you’re already a partnering lender and have questions or if you’re considering using a lender service provider and would like to learn more about Prudent Lenders, contact us today.

Our SBA lending platform enables financial institutions to get SBA loan programs up and running immediately, effectively and without fixed costs.