With the end of the payroll protection program on May 31, 2021, a number of small business owners have wondered and thought about other U.S. Small Business Administration (SBA) loan programs, and perhaps now is a good time to remember why SBA loans are so attractive to small business owners. how much they reduce credit risk and why it is beneficial for the loan applicant.
Generally speaking, SBA guaranteed loans are attractive to small business owners as they have longer terms and lower down payment requirements than conventional loan products. In addition, SBA guaranteed loans have limited interest rates and no additional payments. Loans are disbursed through a private lender and then guaranteed by the SBA. This guarantee reduces the lender’s risk by allowing them to approve borrowers if they would otherwise be unable to provide a loan.
Small businesses are eligible for SBA guaranteed loans. Each loan scenario is based on its merits and the lender’s criteria for providing a loan. As with any conventional loan product, SBA member lenders assess the borrower’s ability to repay the loan. Credit rating is a key indicator of a borrower’s credit history. A low score will be a weakness, and a high score will be a strong point. It is important to remember that you have the ability to “buy” lenders and find the loan terms that are most beneficial for your business. Likewise, even if one lender rejects a loan, another lender can approve it. The SBA works with a large network of lenders, so business owners have many options, including large traditional banks, regional banks, and smaller community-based lenders. Your local regional SBA office can provide you with a list of participating lenders in your area. You can also use the SBA Online Lender Matching Tool to contact SBA Approved Community Development Financial Institutions (CDFIs) and small lenders around the country at www.sba.gov/lendermatch… Many business owners find it helpful to meet with a business consultant from one of SBA’s business consulting partner organizations as they research their funding options. You can find a business consultant near you using our search tool at www.sba.gov/local… These partner consultants can assist the business owner in any aspect of applying for financing, whether it is identifying lenders, preparing a reliable loan package, or even creating or rebuilding a loan if it is a concern. As our partners, these consultants offer their services at low cost or no cost and are a great resource for any business owner looking to start or grow their business.
The application process is managed from start to finish by the participating lender. The exact documents and forms required are determined by the lender. Typically, most lenders ask for your business plan, tax returns, and financial statements (or financial projections for a new company). Consultants from our SBA Small Business Counseling partners, SCORE, Small Business Development Center or Women’s Business Center can assist with the preparation of these documents and the loan package. These services are free of charge.
A potential borrower often asks the question, “How long is the SBA loan application process” or “what is the average waiting time before applicants receive funding after approval?” The easy answer is that it depends on what authority the bank has over the SBA and whether they will process the loan using their delegated authority. If they use delegated authority, they usually get SBA approval immediately. While there are no guaranteed deadlines, in general borrowers report completion of the entire process from two weeks to one month. Faster processing times usually occur when the lender is the preferred lender of the SBA and therefore offers an advantage to work with them. When a lender has the status of a preferred lender, the lender has the authority provided by the SBA to make final lending decisions on SBA-guaranteed loans. Non-privileged lenders must direct loans directly to the SBA for approval, which could extend the process and could potentially be a timing issue.
Borrowers also often want to know the most common reason for rejection of an SBA loan application. This is often due to insufficient or incomplete information about the application or problems of nature, such as a criminal record or bankruptcy. It is important to remember that even with an SBA guarantee, the lender may require the borrower to provide an upfront payment or additional collateral, as an SBA guarantee does not eliminate risk, but simply mitigates 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, join us at our monthly SBA Arizona Virtual Loan Clinic, which will open Wednesday August 4th.th at 9 AM. We will discuss financing options, general loan requirements and tips for preparing a successful loan application. No registration required. The webinar login information is located at www.sba.gov/az
In addition to our website, follow us on Twitter. @sba_arizona and browse our Resource Guide at www.sba.gov/document/support-arizona-district-resource-guide for more information.
Robert J. Blaney has served as the District Director of the United States Small Business Administration in Arizona since 1998. His work experience includes working as a federal agent, police officer, vice president of an insurance broker, and district director of the late Congressman. Jack Kemp.
About the U.S. Small Business Administration
The US Small Business Administration is making the American dream of owning a business a reality. As the only resource and voice for small businesses backed by the power 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 reported disaster. It provides services through SBA’s extensive network of field offices and partnerships with public and private organizations. To find out more visit www.sba.gov…