SBA 7(a) Loan Process
The SBA 7(a) program is one of the most important components of the U.S. Small Business Administration. It has continued to receive bipartisan support in Congress because of the good work it does in promoting sound lending and resulting economic development in the U.S. economy. It does this by providing a partial guarantee of loans made under the program which reduces the lenders loss exposure if a loan goes into default.
In its early years the 7(a) program developed a reputation as being bureaucratic and difficult from a borrower standpoint, but this reputation no longer applies to the current program. The SBA's policies have evolved over time to make the program work very well for the borrower, the lender, and the U.S. taxpayer. A key improvement was the Preferred Lender Program, which allows banks experienced in the program to approve and close 7(a) loans with minimal SBA involvement. A borrower's experience working with most Preferred Lenders is now very similar to applying for a conventional (non-SBA) commercial loan at a branch of your local bank. The credit enhancement provided by the SBA 7(a) guaranty has allowed some lending markets to stay open (i.e. for most hotel, motel, and gas station loans below $5.0 million) that would have otherwise been closed in the years following the Great Recession.
So, if you are having difficulty locating conventional, owner-occupied commercial real estate financing with your local banks, there is a good chance the loan will be available with an SBA 7(a) lender outside of your local market. Not only is it wise to make your application with an SBA Preferred Lender, it is important to select the right Preferred Lender. There is considerable variation in lending parameters among SBA lenders, particularly with respect to property type, loan size, and geography. We will submit your loan to a lender with this highest chance of a successful approval and closing. The lender pays our fee and in most cases our services cost you nothing.
While there is some variation in process among SBA 7(a) lenders, here are the typical steps:
1. Obtain a Letter of Interest: With basic financial information on the business and its owners, we can usually obtain a lender's letter of interest within a few days. It will outline the loan amount, loan terms, and pricing which the lender believes they can approve.
2. Sign Letter of Interest and Send Good Faith Deposit: Most lenders require that you sign their letter of interest and send a refundable good faith deposit (typically a few thousand dollars) before they begin underwriting your loan. Since they will commit many hours of underwriter time to your loan, they ask for the good faith deposit as an indication that you plan to close the loan with them if they approve it. If the loan is declined during underwriting, they will refund your deposit less any third-party costs they have incurred. The lender will usually incur no third-party costs during underwriting. If the lender approves the loan and you decide not to close the loan with them, they will retain the deposit.
3. Underwriting: The underwriter will develop a full financial package for their credit group to review for loan approval. They will also gather information about your other businesses and debt so that they can prepare a global cash flow analysis. Depending on the complexity of your situation the underwriting process will typically take 2 - 3 weeks.
4. Approval and Commitment Letter: If all goes well the lender's credit group will approve your loan on the completion of underwriting and issue a commitment letter. It is a detailed outline of the loan amount, terms and conditions, etc. and will usually closely match what they outlined in their letter of interest.
5. Commitment Acceptance: If the commitment letter terms are satisfactory, the lender will ask you to sign the letter and send an additional deposit to fund the third-party costs (appraisal report, environmental report, closing attorney fees).
6. Preparation for Closing: The lender will immediately order the appraisal and environmental reports and will provide a checklist of items needed for closing. The receipt of the appraisal usually determines when a loan can close, but it will typically take 5 - 6 weeks to prepare for closing.
7. Closing: At closing you will sign the loan documents and provide any down payment/cash injection required in the loan approval.