Navigating the SBA landscape may feel particularly foreign and confusing if you’re unfamiliar with the vocabulary. Luckily, as a lender service provider (LSP), Prudent Lenders facilitates all your client communications with the SBA. This makes it simple for you to offer SBA products without understanding every term, acronym or definition. Like learning any new language, however, knowing a few, key SBA terms can be widely beneficial to your overall confidence and success as a lender. That’s why we’ve created this glossary below:
What is the SBA?
The U.S. Small Business Administration, otherwise known as the SBA, is a federal agency that helps entrepreneurs start, build and grow their businesses. Unlike traditional lending institutions, it doesn’t provide capital to small business owners directly. Instead, the SBA guarantees a portion of the lender’s loan when made according to SBA policies.
Some key SBA lending terms:
- 7(a) Loan Program: As the SBA’s primary and most popular loan program, standard 7(a) loans secure up to $5 million for small businesses to secure working capital, purchase equipment, acquire and/or improve owner-occupied real estate and to refinance debt.
- 504 Loan Program: 504 loans serve small businesses looking to buy or build owner-occupied commercial real estate or to purchase heavy equipment. SBA 504 loans can also be used to refinance existing business debt associated with the aforementioned uses. The typical profile of an SBA 504 loan suggests a bank or traditional lender finance up to 50% of the loan; a community development corporation (CDC) lend up to 40%; and the remaining 10% to be contributed by the borrower. The CDC portion of the loan has a maximum of $5.5 million but total project costs can be significantly higher.
- Borrower Equity: A borrower’s investment of capital (equity) into a project.
- CAIVRS or Credit Alert Verification Reporting System: A reporting system used to determine if a loan application has any federal debt in default or foreclosure.
- Cash Flow: Cash flow is a measurement used by lenders to determine a business’s ability to generate enough income to cover all business and personal expenses and all debt obligations. The SBA requires a lender to review both business cash flow and personal cash flow (called a global analysis). i.e. A global cash flow analysis determines if a business is self-sufficient and, separately, if the personal guarantor is self-sufficient.
- Collateral: The SBA mandates that all available business collateral be pledged as security for a loan – including all fixed assets with monetary value such as buildings and/or equipment. i.e. Something pledged as security for repayment of a loan, to be forfeited in the event of a default. If there is a collateral shortfall in the business then personal collateral, assuming collateral exists, may need to be pledged to secure financing. The blend of business and personal collateral is commonly referred to as the “all available collateral” rule.
- Commitment Letter: A letter sent to the small business customer indicating the approval conditions of the loan as identified in both the loan report and relevant SBA Authorization.
- Community Advantage Loan Program: The Community Advantage Loan Program offers loans between $50,000 and $250,000 through community-based lenders. This Program is particularly dedicated to mobilizing new businesses, generally two years or younger, or those located in underserved communities.
- Disbursement: While some loans are completely funded at closing, many are not. These loans require disbursements over an extended time period and funds are earmarked for pre-determined uses.
- Equity Substantiation: The process of tracking a borrower’s equity contribution to a project through receipts, bank statements, and so forth.
- GPL or General Program Lender: The classification given to lenders participating in the 7(a) Loan Guarantee Program. Most lenders are GPLs, meaning they submit loan guarantee applications to the SBA directly for evaluation on a “first-come, first-served” basis.
- Internal Modification: Internal modifications are the proposed changes between lender and borrower that don’t need to be submitted to SBA for approval. In other words, the lender receives delegated authority to make minor modifications to the loan.
- Loan Report: A document signed by the lender and analyst that accompanies the loan package sent to the SBA for approval.
- Modification: Any change or amendment made to the borrower’s original loan approval and/or the SBA authorization, which are sent to the SBA for approval.
- NAC or No Adverse Change: A form used just prior to loan closing that confirms the company seeking financing has not experienced any negative changes since its approval (i.e. bankruptcy, death of guarantor, fire, etc.). It also itemizes all approval and modification conditions the lender must meet (i.e. appraisals, environmental approval conditions). The NAC form ensures all conditions are satisfactorily completed prior to loan closing.
- Personal Guarantor: Individuals who own more than 20% of the business must provide a personal guarantee on SBA loans.
- PLP or Preferred Lender Program: A special classification for lenders earned by achieving strong loan volume and low default rates. The SBA delegates the entire guarantee approval process to PLP lenders without prior SBA review, decreasing processing times for borrowers.
- SBA Authorization: A written agreement between a lender and the SBA outlining the conditions by which the SBA will guarantee a loan.
- SBA Forms: The SBA issues all forms a number. Below are common SBA forms with their accompanying names and numbers.
- Request for Transcript of Tax Return – aka Form 4506T: This form is sent to the IRS to verify the tax information and is also submitted with the loan application. This form does not replace the required personal/business tax returns (3 years).
- Borrower Information Form – aka Form 1919: This form captures information to determine if a request for financing is eligible for an SBA-guaranteed loan.
- Statement of Personal History – aka Form 912: This form captures information on a person’s history and character. If someone answers “yes” to any question on a 912, it does not automatically disqualify one from financing. Additional information may, however, be needed.
- Fee Disclosure and Compensation Agreement – aka Form 912: This form outlines any fees paid as part of the application process, primarily loan packaging or broker fees.
- SBA Guarantee: The SBA guarantees part of a lender’s loan, which is conditional based on the lender following SBA requirements. This guarantee means if the borrower defaults, the SBA covers a portion of the losses, allowing lenders to consider loans outside their conventional credit requirements. As a lender, it is crucial to protect your SBA guarantee.
- SBA Guarantee Fee: A fee charged by the SBA when they guarantee a loan. This fee is assessed based on the dollar amount of the loan and is generally paid by the borrower.
- SBDC or Small Business Development Center: An SBDC is part of a network of more than 1,000 centers where small businesses receive a variety of support services. Through low-cost training, workshops and one-on-one assistance, SBDCs contribute to the development and productivity of U.S. business and economy within their local region.
- SBSS Score or FICO® Small Business Scoring Service: A score used to pre-screen 7(a) and Community Advantage loans on applications up to $350,000.
- Screen Out: If a loan is “screened out,” it means the SBA requires clarity and/or correction on a submitted file.
- SBA Secondary Market: Lenders are able to sell the guaranteed portion of SBA guaranteed loans to investors on the “secondary market.” This improves the lender’s liquidity and increases their yield on the unguaranteed portion of SBA loans.
- SOP or Standard Operating Procedure: The SBA’s SOP is a detailed instruction manual highlighting policies and procedures for administering SBA loan programs.
- Underwrite: Loan underwriting is a process all lenders use to assess an applicant’s credit risk and decide whether to issue a loan. In SBA lending, every dollar an applicant requests should have a mandatory job. In this regard, lenders underwrite businesses and the purpose of the financing to ensure the project will be adequately capitalized.
- U.S. Small Business Administration (SBA): An independent agency of the federal government created in 1953 to help Americans start, build, and grow businesses by delivering lenders loan guarantees and by offering borrowers counseling sessions and other forms of assistance for their small businesses.
Familiarizing yourself with key SBA terms will help you communicate more effectively with small business clients. Get in touch today and learn more about how partnering with Prudent Lenders –and its team of fluent SBA speakers—can help you!