How SBA Loans Work: SBA101
This is an interview with Key Bank's Carrie Callaway-Cardy, Vice President, Senior SBA Relationship Manager. I wanted to highlight some of the key principles around SBA lending that are covered in most of my clients' discussions with Carrie.
This is a brief synopsis. You can find all kinds of detailed articles about SBA loans online. This is a practical view on the main points of understanding:
First, it's important to understand that the SBA does not LEND the money, they merely GUARANTEE the loan (or 75% of it, anyway). You still need to work through an SBA-approved bank. They are lending their money and need to go through their underwriters to see if they can get the loan backed by SBA according to their guidelines. Using a lender that is a certified “Preferred Lender” is ideal, as they can make decisions on SBA loans themselves without having to ask the SBA to chime in.
How do I qualify?
First, the business is qualified. If you don't know the exact business you want, you can still start the SBA loan process by inserting the TYPE and relative SIZE of the business you are looking at. SBA lenders need the business you want to buy to be profitable enough to pay you and support your loan payments with some left over.
Second, you the buyer, are qualified based on experience, liquid assets (that you have the down payment and a cushion after) and credit/personal background. They approve or deny the loan based on the business primarily, but credit score and repayment history still matter.
What kind of fees and interest are there? How long is a typical loan?
Generally banks range between 2-2.75% over prime. There are a few other fees: Attorney fee: Usually around $2,000, Business Valuation fee around $2,000 - $2,500 and a fee to the government for the guaranty that is determined by loan amount. If you have a smaller business, there can be an in-house valuation and you don't need a third party Business Valuation. Most loans are around 10 years with no prepayment penalty. You almost always must have a lease in place for at least the length of the loan or options to get there.
How do I get pre-qualified?
Supply a basic SBA application packet, 3 years of financials, and basic business transition plan to the bank and the bank will send you a Term Sheet Proposal stating the type of loan, terms, rate, collateral, covenants, Good Faith Deposit and down payment required of at least 10%. In some cases, 5% of your down payment may come as a Seller Note if you wish.
How long does it take?
Once the SBA Loan Application is submitted you may hear back within days or a week with a Term Sheet Proposal. Once the final documentation is supplied by you (including a signed around letter of intent or sales agreement), you can plan on 45-60 days. Keep in mind that the required paperwork may trickle in from various sources, so the entire process may extend for several months while information is gathered and reviewed.
What if I don't get approved?
If you don't get approved, consider a 2-year Seller Note. Once 24 months of on-time payments have been made and documented, the SBA will do another in-house valuation and you are likely to qualify with this special consideration.
Thank you to Carrie for her insight on this article. Contact Carrie if you wish to start the SBA loan process and she'll walk you through the steps.