What is the SBA 7(a) Loan Process?
From a high level perspective, SBA 7(a) Lenders generally have similar steps in approving and processing a 7(a) loan. These steps include four major stages:
SBA 7(a) lenders may use different names for these stages, may accomplish certain tasks in different stages, or may omit completing certain tasks at all. For example, some lenders order appraisals at the Underwriting stage while others wait for the Processing stage. While others, go directly to the formal Underwriting stage. This article will not be able to cover all these details. Prior to applying with any SBA 7(a) lender, you should understand the specific details of the SBA 7(a) Lender’s process and the pros and cons of each.
This is the initial stage where the lender provides you a checklist of information. Once you provide the items on the checklist, the SBA Business Development Officer (BDO) or Lender will review the documentation for completeness. Most SBA BDO’s/Lenders will also complete an initial review, which may be a “back of the napkin” analysis or a formal review. If a review occurs, you should expect some questions back and forth. The SBA BDO/Lender will determine initial SBA eligibility and compliance with its credit criteria. If you pass this initial screen, you will most likely receive a Letter of Interest/Intent (LOI). This will outline proposed terms and conditions including loan amount, term, interest rate, fees, etc. subject to formal approval. If you agree to the terms and conditions, you will most likely need to put a deposit with SBA 7(a) Lender. Please ensure this deposit is refundable should the loan not get formal approval or there is a material change in the terms and conditions.
Once you accept the LOI, another checklist will be issued of items needed for underwriting to complete its review. Once these items are collected, the loan is submitted to Underwriting.
A quick point about checklists. There are generally three main checklists throughout the process including the qualification checklist, the underwriting checklist, and the processing/closing checklist (sometimes this is broken into separate checklists). Each of these checklists are living documents. It is not unusual for items to be added to the checklist after the initial items are reviewed.
This is when the SBA 7(a) Lender takes a deep dive into your business, your industry, your personal background and financial wherewithal along with any other 20% owner including other businesses owned, and your loan request. The underwriter's main function is to perform an analysis of the 5 C’s of credit and determine SBA eligibility. The 5 C’s of credit include your Character, your Capacity to repay, the Collateral offered, your Capital in the project and in your business, and Conditions of the loan including purpose and amount requested. During underwriting, you should expect additional questions as well as requests for additional documentation to be added to the underwriting checklist. Once the underwriter completes his/her analysis and recommendation, it is presented for approval. If approved, a Commitment Letter is issued outlining the final terms and conditions as well as the closing requirements.
When you accept the Commitment Letter, you will be required to place a deposit and/or apply any deposit from the LOI to help pay for the costs associated with the loan (e.g. appraisal, business valuation, attorney, etc). If these costs are included in your loan, you will be reimbursed when the loan closes. The loan will then move to the Processing stage.
This is when the lender gets approval from the SBA and engages an attorney. Lenders obtain approval from SBA through two methods. Delegated Lenders obtain instantaneous approval from SBA’s online system. Non-Delegated Lenders must submit a full application to SBA which is then reviewed. There are instances in SBA regulations when Delegated Lenders must submit applications through the non-delegated process.
The Lender will provide a final checklist of information needed. This will cover items needed for obtaining SBA approval as well as closing the loan. This list is a living document and there is a strong likelihood additional items will be added as documentation is provided by you and the Lender’s attorney.
Once all documents are received from the checklist, a closing date is set. At Closing, you will sign loan closing documents and receive the proceeds from the loan.
Prior to selecting any SBA 7(a) lender, it is important to understand their process and learn about its people to ensure the lender has the capability and capacity to handle your loan request.