The Basics for Obtaining an SBA Loan

The SBA (Small Business Administration) is a federal government agency which has the power to guarantee loans funded by lending institutions.  These lending institutions are all banks or credit unions
except for fourteen non-bank lenders.

The SBA has a set of regulations called the “Standard Operating Procedure” which must be met before the SBA will guarantee a loan.

This “SOP” is one of two sets of rules which are used by an SBA Lender to underwrite a loan.  The second set of rules are the underwriting criteria set by each SBA Lender who individually decide on the “overlays” which are added to the SBA’s Standard Operating Procedure.  These overlays can require additional requirements from the Borrower, but never less then what is mandated by the “SOP”.

Each  SBA Lender decides how much risk it is willing to take for each submitted loan.  Risk is another way of saying the odds of any particular Borrower defaulting on a loan.  The Lenders mandate their own underwriting criteria to minimize this risk of a Borrower default.  I call these mandated underwriting rules “underwriting overlays” as these rules are in addition to and usually more stringent then the SBA Regulations.

SBA mandated regulations are in the form of a “code” called the ‘Code of Federal Regulations’.  This Code is a living document much life the Federal and State Statutes.  It is subject to change on a regular basis.  The SBA has various Administrators who interpret these regulations for use by the Lenders and Borrowers.  Lenders must adhere to these interpretations to obtain the SBA guarantee when a loan closes.

Examples of Underwriting Overlays:

SBA Regulations                                          Underwriting Overlays

No Minimum Credit Score                         640 + middle score of three
Will Fund Start Ups                                     Will not fund Start Ups
Loans with No Collateral                            Loans with Collateral Only
Minimum Loan of $5,000                           Minimum Loan of $350,000
No Waiting Period after Bankruptcy        Waiting Period after Bankruptcy of two years

The SBA wants Lenders to fund loans with no collateral.  The underlying philosophy is the SBA will guarantee 75% of the loan amount, so the Lender should accept the risk of the other 25% without collateral.  This is philosophically why the SBA was created.  The more loans funded, the more jobs created.

However, the SBA does not enforce this philosophy.  Lenders are allowed to place as much or as little underwriting overlays as may be deemed necessary to be protected against the risk of the loan.

Based on risk based underwriting which all Lenders use to create their underwriting requirements, you will find that local lenders and lenders who fund loans in the smaller (more restricted) geographic areas will have more stringent underwriting criteria then the SBA Lenders who have a national scope.

The reason is quite simple.  The more local lenders are using their own funds and often keep the loans in their own portfolios.  The more regional and national lenders sell the SBA Loans on the secondary market to replenish their money source and make more loans.  This also reduces their risk if a loan defaults.  The SBA will tolerate some small default rate from lenders.

Conversely, if a local lender is using its own money and waiting for more money to come in from internal sources, it will be more cautious and make fewer loans.

As you can now understand, there are as many lending decision makers as there are SBA Lenders.  Nothing is uniform and often no two SBA Lenders interpret the facts of a loan in the same way.  This is why it is important to know how an SBA Lender will use the SBA ‘SOP’ and its own ‘Overlays’ to decide if a particular set of loan facts will have underwriting approval.

Certainly it is better to know the underwriting criteria and SBA regulations which bear directly on a particular loan issue before presenting the loan to the SBA Lender.

However, it a loan is turned down by one SBA Lender, it does not mean that the loan cannot qualify with another SBA Lender.  Or, the issue can be worked out with the aid of an accountant, attorney or well versed SBA Loan Broker.