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Learning from a Lender Series - Speaking with an SBA Lender for the First Time

Writer's picture: Paul JastrzebskiPaul Jastrzebski

SBA financing often may provide small businesses excitement to help support the next project with 90% Financing to support a variety of transactions, including real estate purchase, working capital, equipment purchase, debt refinancing, business acquisition, leasehold improvements, expansion or renovation, inventory purchase, start-up costs, tenant improvements, seasonal financing, export working capital, construction of new facilities, agricultural loans, and refinancing existing debt:


The opportunity may also create confusion with all the SBA products from hearing all the rumors of the process, time delays, and how these loans work. Knowing what fits SBA financing and will be approved, but also finding a great SBA partnering lender, being prepared with the right information, and asking the right questions have shown to be critical to a successful experience in obtaining any SBA loan.


Before speaking with a lender, it's good to have the following items in mind as your SBA partnering bank will be inquiring about the following if your loan would be eligible for SBA financing and meet bank credit terms.


Most lenders will try to cover/answer/address all items below eventually, so get ready, saddle up, and good to be ready for them:


  • What’s the purpose of the transaction?

  • Project size?: Most SBA lenders on average typically look for a minimum project size of $500k+ (though case-by-case lenders would go much lower). A local community bank would be better for smaller projects.

  • Project in the US, location? Must be US US-based business

  • Who’s the personal guarantor(s)? Required ALWAYS at least one personal guarantee for each loan. Also please note any owner of the business with 20%+ ownership will be required to provide a full personal guarantee.

  • What industry or type of business? SBA has financed everything from huge industrial facilities, car washes, gas stations, franchises, coffee shops, auto repair shops, body shops—you name it, helping 98% of most all “small businesses” nationally.

  • Now to get technical (most likely won’t be you), ones that are ineligible for SBA loans include speculative real estate investment firms, banks and lending institutions, life insurance companies, pyramid sales schemes, businesses involved in illegal activities, gambling businesses, political and lobbying activities, private clubs, government-owned entities, sexually oriented businesses, speculative investments, businesses located in a foreign country, loan packagers, passive businesses, and businesses primarily engaged in political or lobbying activities.

  • Are you under contract if purchasing real estate? LOI Stage?

  • Estimated timing: Usually SBA financing takes 45-60 days, contingent on receipt of a full application package but very dependent on the borrower providing what's requested.

  • Purchasing Commercial Real Estate? Must be 51%+ owner-occupied, NOT investment real estate. So not investment condos. You can have a tenant there, but the business needs to occupy 51% of the rental square footage subject property.

  • Is there construction? Budgets? GC in place? Permits?

  • Have you had prior bad SBA debt or bankruptcy? This may potentially disqualify you for future SBA lending.

  • Are you in business today? If this is an expansion?

  • Do you have a business plan in advance if a new business? (Today it’s a little difficult to submit for formal underwriting on a new business operation without a formal business plan & Projections upfront)

When a client is seeking SBA financing, bankers will typically focus on several key elements to assess the eligibility and viability of the loan application. Here are the primary factors they consider and be ready to answer or hold up moving forward on any financing that still is addressed. A few items below but not limited to the following:


Creditworthiness

  • Credit Score: Both personal and business credit scores are crucial.

  • Credit History: Review of past loans, payment history, bankruptcies, and delinquencies.'

  • Personal Guarantee: requires a personal guarantee from the business owners.

  • Business Financials (For existing business or financials of business may be purchasing as applicable)

  • Income Statements and Balance Sheets: To assess profitability, cash flow, and financial health.

  • Tax Returns: Usually for the past three years for both the business and the owner.

  • Debt Service Coverage Ratio (DSCR): To ensure the business can cover its debt obligations.

  1. Business Plan

  • Detailed Business Plan: Including market analysis, business model, competitive landscape, and growth strategy.

  • Management Experience: The background and experience of the business owners and key managers. Collateral

  • Assets: Both business and personal assets that can be used as collateral.

  • Collateral Coverage: The value of collateral relative to the loan amount.

  1. Use of Funds

  • Purpose of Loan: Detailed explanation of how the loan proceeds will be used (e.g., purchasing equipment, working capital, real estate acquisition).

  1. Equity Injection

  • Owner’s Investment: The amount of money the business owner is investing in the business. SBA loans typically require an equity injection of around 10-20%.

  1. Industry and Market Conditions

  • Industry Stability: The viability and risk associated with the industry the business operates in.

  • Market Position: The business's position within the market and competitive advantage.

  1. Repayment Ability

  • Cash Flow Projections: Future cash flow estimates to ensure the business can repay the loan.

  • Existing Debt: Review of current debt obligations and their impact on cash flow.

  1. Legal and Compliance Issues

  • Legal Structure: Business formation documents and structure.

  • Licenses and Permits: Necessary licenses and permits for operation.

  1. Personal Background and Character

  • Background Check: Criminal History and pers onal character of the business owners


All the above will be asked/determined to help evaluate the risk associated with the loan if it makes sense to move forward with the subject bank and to ensure that the business meets the SBA’s eligibility criteria. As you can see, SBA financing requires the right information to be presented to any SBA lender but as soon as they all can be addressed, this will permit any potential application to help move forward quickly and smoothly.

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