Choose the right SBA lender
How to choose the right SBA lender. There is no question that finding a source of finance to buy a business right now is incredibly tough. Be it good or bad, the market for finance for business acquisitions centers around loans done through the Small Business Administration or SBA loan programs. A 7A loan is for the purchase of a business while a 504 Loan is the purchase of commercial real estate.
The SBA which is a government agency, underwrites a large percentage of the loan for the banks that offer small business loans. This guarantee is very attractive for the banks and to make sure they make quality loans a rigorous set of rules and audits make sure the loans are underwritten to a high standard.
If you are thinking of buying a business and you want to find the right SBA lender, here are some items to check to make sure you find one that works for your situation.
1. Does your bank write SBA loans?
The main form of small business lending right now is an SBA loan because the Federal Government through the Small Business Administration or SBA is underwriting a large portion of the loan. The two main loan types for a small business are 7A loans to buy a business and a 504 loan to buy commercial real estate. If the bank you are talking to does not do SBA loans check them off your list and look for another bank.
2. Is your bank a PLP or CLP?
If the bank writes SBA loans the next question is are you a PLP or CLP? A PLP means part of the Preferred Lender Program and the highest loan approval rating a bank can receive from the SBA and shows it has a lot of loan experience. It also means the bank doesn’t need to send the loan document package to the SBA for processing and approval. This means faster loan process and approval time. A CLP or Certified Lenders Program means the bank is qualified to process SBA loans but they prepare the loan document package and send it to a Regional SBA office for review and approval.
3. How does your loan process work?
A bank may have rules for certain loans which may or may not allow final approval. For example, small community banks may not have the same constraints as a midsize or national bank with loan commitments. Most national and regional banks require authorization and have a frequency of when they meet and make a decision. Understand the bank process and if you find it too slow, look for another SBA lender.
4. How many SBA loans did you write last year?
Data is readily available on which banks issued SBA loans over quarterly and annual periods. Your bank can and should be able to tell you when you ask. If the number of loans they have approved isn’t high you have a sign of how hungry they are to write a loan.
5. Do you have an SBA loan specialist on your team?
Banks normally have a Business Development Officer or some similar title to be in the community to attract and process loan applications. Part of their role is to triage the loan applications including the details of the borrower, the quality of the asset they want to buy and other details that will provide a decision about whether they are interested in that particular loan. An initial decision should be able to be given fairly quickly as a quick no is much better than a slow maybe which will probably eventually be a no anyway.
6. Does your bank have a loan lending limit?
If your loan is to fund a business that may grow and grow quickly and will need additional finance to sustain your growth, ask the bank their lending limit on their loan sizes. If you need access to additional finance and have your loan maxed out with your lender you’ll have to waste time bringing a second bank up to speed and processing loans with two banks.
7. What industries were they?
Not all banks lend to every type of business in every type of industry. Some lenders like restaurants, gas stations or the construction industry. Most don’t. Your bank can give you a quick answer to this question so if the answer is that they don’t like your industry, look for one which does.
8. Do you need my credit score, credit report and other personal information?
The starting point for most loan applications is the credit score of the borrower and a personal financial statement which they collect on SBA form 912. I just worked with a borrower that had an issue on the form 912 and it took just over 6 months to get final loan approval. If your credit score, credit report or form 912 requires a negative answer to a question, deal with it up front as if you try to avoid it and it comes to light later the loan will highly unlikely be approved. This situation creates so much frustration with the amount of time it takes to resolve. Click this link to see a sample SBA personal history form 912.
9. What is your loan collateral policy?
An SBA loan is underwritten by Federal taxpayers. The SBA therefore wants the borrower to provide as much collateral as possible so the borrower has the highest incentive to work hard and service the loan. Understand how much you will have on the line and if you are comfortable with this risk.
10. What other lending relationships do you have?
The maximum amount of a SBA loan is $5 million. If you will need to borrow more money then ask your bank what other lenders they can connect you with such as Angel Investors, Venture Capitalists or other sources of mezzanine finance.
11. If you approve my loan do you require my daily banking?
Perhaps you have personal bank accounts with another bank and you enjoy using their services. Some SBA lenders want access to all your banking including your deposits. If you don’t want to move those accounts to your new SBA lender, ask so you know where you stand.
An SBA loan is generally only approved for borrowers with a credit score of at least 680, no criminal convictions, a good credit report, experience in the industry they want to buy a business or real estate.
If you are looking for an SBA loan and want help finding a lender, give me a call on (916) 570-2674 as I have a number of relationships with different SBA lenders both locally, regionally and nationally.