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June 4, 2020   /   Andrew Sheaffer

Using an SBA loan can help grow your small business but there are pros and cons. Although the SBA loan application may require time and effort, we feel the long-term advantages outweigh the cons for many small-business owners.  This is especially true for owners interested in longer repayment periods and lower interest rates.

If you’ve made the decision to pursue SBA financing, the application process can seem intimidating in the beginning. However, keeping these four main areas top of mind can help you efficiently and effectively navigate the process from start to finish.
SBA Loan Application

1. Identify Loan Purpose

Be specific.  Lenders need to understand why you’re in need of financing, how much money is required and how you intend to use the funds.  You should be able to articulate how the loan will help your business, how it fits within your overall growth strategy and accurately forecast projections based on the desired loan amount.  Not only do lenders appreciate business owners who can clearly convey this information, but it will also help expedite the pre-approval and underwriting processes. 

Keep in mind some of the following examples when updating your business plan:

  • Refinance Existing Debt
  • Purchase Equipment, Inventory or Real Estate
  • Acquire a Business

You should be sure to have a detailed explanation prepared for other business expansion opportunities as well. (i.e. hiring new employees, advertising or marketing, opening new locations, etc.).

2. Understand Eligibility Requirements

The SBA has specific eligibility criteria for businesses, guarantors and uses of proceeds and an applicant should understand these criteria.  SBA 7(a) loan applications can be time consuming so it’s critical to ensure certain eligibility criteria is met prior to investing significant time and effort.  Eligibility for the SBA program can be summarized across five general categories:

  • Guarantor – Must have acceptable credit, be a U.S. citizen or legal permanent resident with no previous government loan defaults and cannot have more than $5 million in outstanding SBA loans.
  • Borrower – Businesses must be for-profit, based in the U.S., make less than $5 million in after-tax income annually and tangible net worth must be less than $15 million.
  • Industry – Ineligible industries include (but are not limited to) lenders, pyramid schemes, religious affiliations, private clubs and companies that make more than 1/3 of revenue from gambling.
  • Structure – Loans cannot exceed $5 million and terms and must be fully amortizing over a maximum term of 25 years for real estate and 10 years for all other uses.  Owners of 20% must personally guarantee the loan.
  • Use of Proceeds – Eligible financing includes working capital, business acquisitions, real estate or equipment purchases, debt refinancing or construction.

Many SBA lenders will have their own unique set of eligibility requirements over and above SBA guidance. Personal credit score, how long you’ve been in business and cash flow considerations are typically included in a lender’s determination for approval.  Many but not all SBA lenders require the following:

  • Operating business for at least 2 years
  • Minimum personal credit score of 650
  • Minimum global DSCR of 1.25x

Mitigating considerations that may allow for an SBA loan include personal liquidity and prior industry experience.

3. Prepare Your Documents

Once you’ve identified a need for capital, how that capital will be used and have determined a basic understanding of the qualification requirements, it’s time to start gathering your documents.  The SBA 7(a) loan application process requires specific documentation, regardless of which financial institution makes the loan.  While the entire documentation package depends on the nature of the transaction and the lender, the initial request will include:

  • Business and personal tax returns (past three years)
  • Business debt schedule
  • Business interim financial statements
  • Personal financial statement for all guarantors

This initial request will be followed by additional documentation for items including legal documentation, leases and other documents necessary to document and close the loan.

4. Find the Right Partners

Many financial institutions offer various types of SBA loans, ranging from small community banks and credit unions to large national banks.  In FY2019, 1,708 different lenders in the U.S. approved at least one SBA 7(a) loan application.

“Preferred” SBA lenders have the capacity to expedite pre-approvals while non-delegated lenders are required to submit a complete application package to the SBA for approval. When researching partners, it’s important to consider:

  • Type of Lender – You can get small-business loans from several institution types that may specialize in certain products, including banks, credit unions, CDFI’s (Community Development Financial Institutions) and online lenders.
  • Delegated v. Non-Delegated – Experienced SBA lenders can apply for “delegated” authority which allows the institution to expedite the approval process.
  • Online SBA Loan Marketplaces – Service providers that do not fund loans but rather assist with connecting potential borrowers to experienced lenders through the utilization of streamlined processes and technology.
  • Other Resources – Your local SBA District Office and/or local SBDC (Small Business Development Center) can help provide free or low-cost consultation.

Putting together a complete SBA loan application isn’t a simple task but the benefits make the effort worth it.  The lender will want to uncover a significant amount of information about your business to determine credit worthiness.  To be successful, you must stay organized, highlight the positives about your business in the loan application and be extremely responsive when asked for additional information.  The speed of the pre-approval and underwriting processes will ultimately depend on the information you’re able to provide.  If you’re well-prepared, you can put your best foot forward and obtain funding quickly.

To get started with your SBA loan application, contact West Town Bank & Trust at (855) 693-8290.


About West Town Bank & Trust

At West Town Bank & Trust, our most important goal is to understand what’s important to you, what’s getting in your way, and what you hope to achieve, so we can help you get there. Since 1922, we’ve been creating long-lasting relationships with our customers based on old-fashioned values and future-thinking ideas.  Whether solutions come from surprisingly innovative tools or trusted products you’re familiar with, our single-focused purpose is your financial well-being.