The SBA has a wide variety of SBA loan programs available for small businesses. The three most popular loan programs, which comprises over 95% of all loans we see, are the following:
|Loan Program||Loan Max||Interest Rate||Credit decision||SBA turnaround||Forms||Collateral|
|Standard 7(a)||$5,000,000||SBA Max or less||SBA, unless PLP lender||5-10 days||Form 1919 & Form 1920||Maximum extent possible|
|7(a) Small Loan||$350,000||SBA Max or less||SBA, unless PLP lender||5-10 days||Form 1919 & Form 1920||Maximum extent possible|
|SBA Express||$500,000||SBA Max or less||By lender||Within 36 hours||Form 1919 + lender forms||Lender's collateral policy|
The biggest differences between the various SBA loan programs come down 1) the loan amount 2) the credit decision 3) SBA turn around time and 4) forms required. In general, for smaller loans where there is a SBA preferred lender (discussed below), the SBA turn around time is less because the SBA relies on the preferred lender to make the credit decision.
Current SBA maximum loan rates
Maximum interest rates on SBA loans vary based on the prime rate set by the U.S. Federal Reserve plus a “fixed rate,” which is between 2.75% – 4.75% depending on the size of the loan. SBA lenders are free to negotiate whatever interest rate they want, but typically, especially in rising rate environments, banks tend to close loans closer to the maximum allowable rates.
|Loan Amount||Fixed+||Prime||SBA Interest
|$50,000 - $5,000,000||3.0%||8.0%||11.0%|
|$25,000 - $50,000||4.0%||8.0%||12.0%|
SBA Form 1919 is a required loan application form used by the SBA to evaluate and process applications for its 7(a) loan program. All SBA loans require a completed Form 1919. SBA Form 1919 is a detailed and comprehensive form that asks for information about the borrower, the borrower’s business, and the loan request. It includes sections on the borrower’s personal and business financial history, the proposed use of the loan proceeds, and the borrower’s repayment plan. The form also asks for information on the borrower’s creditworthiness, including credit scores, credit history, and any outstanding debt.
SBA Form 1919 is typically accompanied by other supporting documents, such as financial statements, tax returns, and business plans. The information provided on the form and the supporting documents is used by the SBA to assess the borrower’s creditworthiness and determine whether the loan request meets the eligibility requirements for the 7(a) loan program.
We encourage you to review Form 1919 prior to speaking with SBA bankers so you have a flavor for the type of information SBA banks will request.
SBA Form 1920 is a form required to be completed by the lender and not the borrower. The form is used to confirm the borrower complies with all the various regulations and requirements under the SBA 7(a) loan program.
SBA Preferred Lenders (aka PLP lenders)
An SBA Preferred Lender is a lender that has been approved by the Small Business Administration (SBA) to participate in the SBA’s 7(a) and 504 loan programs. These lenders are sometimes called PLP lenders since the lenders are participants in the SBA’s Preferred Lender Program (“PLP”). To become an SBA Preferred Lender, a lender must meet certain requirements set by the SBA, including demonstrating a track record of success in making and servicing SBA-guaranteed loans, having a strong understanding of SBA lending policies and procedures, and having the financial and managerial capacity to effectively administer SBA-guaranteed loans. All of the lenders to whom we introduce borrowers at SBALenders.com are preferred (PLP) lenders.
As an SBA Preferred Lender, a lender has the authority to approve and disburse SBA-guaranteed loans without the need for additional review and approval by the SBA. This allows the lender to offer faster turnaround times and more streamlined loan processing for small business borrowers.
Top reasons SBA loans are declined
Over 80% of all 7(a) requests we see are for acquisition loans. Here are the top reasons SBA banks decline to finance acquisition loans (from most to lease prevalent)
- Insufficient cash flow: The SBA wants to ensure that borrowers have the financial capacity to repay the loan. If a borrower’s business does not have sufficient cash flow to meet its financial obligations, the application may be declined. In general, the loan amount needs to be five times (5x) or less than cash flow of the business. For example, for a $1,000,000 loan request, the business needs to generate positive cash flow of $200,000 or more to provide enough cash to meet the monthly loan payments.
- Lack of a down payment from the buyer: The SBA requires buyers put a minimum of 10% into a transaction. For a $1,000,000 acquisition, that means the most that can be financed will be $900,000. If the buyer has little or no experience in the industry of the target, banks may require 15% – 25% down.
- Insufficient credit history or poor credit score: The SBA generally requires borrowers to have a good credit history and credit score in order to qualify for a loan. If a borrower has a limited credit history or a credit score below the mid 600s, obtaining an SBA loan will be more difficult. Also, buyers need to understand that all 20% owners will have to supply their credit scores and personally guarantee the loan.
- Lack of personal liquidity: SBA lenders do not want to see a borrower drain all of his/her personal liquidity to fund an acquisition. Rather, bankers want to see that after funding any required down payment, a borrower has enough personal liquidity (cash, stocks, other liquid assets) – typically 10% or more of the transaction – in case the business declines post-acquisition and the buyer is forced to inject more capital into the business. Back to our $1,000,000 acquisition example, during the application process the bankers will want to see personal liquidity from the buyer(s) of at least $200,000 – $100,000 or more to finance the buyer’s portion of the purchase price plus $100,000 or more of post-closing personal liquidity.
- Insufficient business experience: Banks prefer to lend to businesses with a proven track record of success. If a borrower lacks sufficient direct industry experience, the application may be declined. Lacking industry experience, some banks will be satisfied with “relatable experience,” meaning the borrower has experience in another industry that may translate very well to the current business the borrower is looking to acquire.
- Years in business: Most SBA banks want to see two full years’ tax returns from the business. Some will make exception for proven franchises if other aspects of the loan application are stellar (e.g., high credit score, large equity injection from buyer, and excellent personal liquidity).
Small Loan and SBA Express loans
- Insufficient credit history or poor credit score: For smaller loans, bankers want even higher credit scores, typically 700 or better
- Years in business: Two full years of operating history evidenced by federal business tax returns.
- Insufficient cash flow: