With the Paycheck Protection Program ending on May 31, 2021, a number of small business owners have been asking questions and thinking about other U.S. Small Business Administration (SBA) loan programs, and it’s is perhaps a good time to remember why SBA loans are so attractive to small business owners, how they reduce lender risk and why this is advantageous for a loan applicant.
Generally speaking, SBA-backed loans are attractive to small business owners because they have longer terms and lower down payment requirements than conventional loan products. Additionally, SBA-backed loans have capped interest rates and no lump sum payments. Loans are made through a private lender and then guaranteed by the SBA. This security reduces the lender’s risk, allowing them to approve borrowers when they might not have been able to extend credit otherwise.
Small, for-profit businesses are eligible for an SBA-backed loan. Each lending scenario is based on its own merit and the lender’s criteria for granting credit. As with any conventional loan product, SBA participating lenders assess the borrower’s ability to repay the loan. Credit score is a key indicator of a 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 ability to “shop around” for lenders and find the loan terms that best benefit your business. Along the same lines, even if one lender refuses the loan, another lender might approve it. SBA works with an extensive network of lenders, so business owners have many options, including large traditional banks, regional banks, and smaller community lenders. Your local SBA district office can provide you with a list of participating lenders in your area. You can also use the SBA’s online lender matching tool to connect with SBA-approved Community Development Financial Institutions (CDFIs) and small lenders nationwide at www.sba.gov/lendermatch. Many business owners find it helpful to meet with a business advisor from one of SBA’s business advisory resource partner organizations when researching 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 help the business owner with all aspects of applying for finance, whether it’s identifying lenders, preparing a strong loan case, or even building or repairing credit. if that is a problem. As partners, these advisors offer their services at low or no cost and are a great resource for any business owner looking to start or grow their business.
The application process is managed by the participating lender from start to finish. The exact documents and forms required are 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 business). Counselors from our SBA Small Business Counseling Partners, SCORE Association, Small Business Development Center, or a Women’s Business Center can help prepare these documents and the loan application. These services are free.
A question often asked by a potential borrower is “how long does the SBA loan application process take” or “what is the average wait time for applicants to receive funding after approval?” The easy answer is that it depends on the authority the bank has with the SBA and whether it processes a loan using its delegated authority. If they use delegated authority, they usually receive SBA approval instantly. Although there is no guaranteed time frame, generally borrowers report completing the entire process between two weeks and one month. A faster 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 the authority granted by the SBA to make final credit decisions on SBA-backed loans. Non-preferred lenders must submit loans directly to the SBA for approval, which can lengthen the process and potentially pose a timing issue.
Borrowers also often want to know the most common reason an SBA loan application is rejected. Often this is due to insufficient or incomplete application information or character issues, 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 security, as the SBA guarantee does not eliminate risk, it simply reduces it. The exact terms of what is required are based on the overall risk of the transaction. Always remember that personal guarantees also apply and the borrower has an obligation to repay.
To learn more about how SBA loans can benefit your small business, please join us for our monthly SBA Arizona Virtual Loan Clinic, coming up Wednesday, August 4th.and at 9 a.m. We’ll discuss financing options, general loan requirements, and tips for preparing a successful loan application. No registration necessary. Webinar login information is at www.sba.gov/az
In addition to our website, please follow us on Twitter @sba_arizona and check out our resource guide on www.sba.gov/document/support-arizona-district-resource-guide for more information.
Robert J. Blaney has served as the U.S. Small Business Administration’s District Director for the State of Arizona since 1998. His experience includes work as a federal agent, police officer, vice president of a brokerage firm insurance company and district manager for the late congressman. Jack Kemp.
About the United States Small Business Administration
The United States Small Business Administration is making the American dream of business ownership a reality. As the single, go-to resource and voice for small businesses backed by the strength of the federal government, the SBA gives entrepreneurs and small business owners the resources and support they need to start, grow, or grow their business, or recover from a declared crisis. disaster. It provides services through an extensive network of SBA field offices and partnerships with public and private organizations. To learn more, visit www.sba.gov.