The #1 rule about SBA lender selection is that all SBA lenders are different.
Small Business Owner Resource
From our experience, the biggest misperception about SBA lenders is that they are all pretty much the same. After all, how different can an SBA loan be from one lender to the next?
The truth is that while the SBA is the same for all, SBA lenders are very different from each other, and many are different in many ways.
SBA lenders have different preferences and focus on different types of industries in different locations. Some SBA lenders shy away from smaller loans, while others specialize in them. Some lenders focus on franchise businesses, while others have never funded a franchise business.
Some SBA lenders take SBA lending seriously, make it a priority, and have their systems and processes dialed in. Others only do an SBA loan once in a blue moon. Nearly half of the SBA lenders who approved a loan in 2020 approved five or less for the whole year. One of every five SBA lenders only approved one loan in 2020. There is a big difference working with an SBA lender that approves one loan a year vs. hundreds or thousands.
Each SBA lender has different policies, requirements, and underwriting criteria stacked on top of the those required by the SBA. Just because the SBA SOP (Standard Operating Procedures) allows for something, it doesn’t mean the SBA lender you’re applying with will allow it, or only require what the SBA requires. While the SBA has specific black and white rules on many topics, the SBA also defers to the SBA lender’s standard policy for non-SBA loans on many of the requirements.
For example, the SBA provides a path for an SBA lender to lend to a business owner with a prior bankruptcy, but many SBA lenders still won’t lend to borrowers with a previous bankruptcy. Or take the SBA’s equity injection rules when purchasing a business. The SBA allows for “assets other than cash,” to be used as the equity injection but many lenders will always require a cash down payment anyway. Another example is that while the SBA doesn’t require property collateral for loans under $350,000, some lenders have internal policies that will result in a junior lien position (if there’s a current mortgage). We could list many dozens of these types of examples.
The key credit decision-based criteria that SBA lenders have can vary significantly by lender. This includes credit score minimums (for loans > $350,000) and minimum years in business (a lot of SBA lenders are not interested in startup loans). The debt service coverage ratio (DSCR) minimum requirements also vary, leading to the same borrower getting up to 50% more lending dollars from one lender than what they could be approved for by another lender.
Rates can vary by different lenders as well but with the SBA’s cap on rates this is within a relatively narrow range for standard 7(a) loans. SBA guaranty fees are the same for all loans (and currently being waived through September 30th). Most SBA lenders provide variable rates, but some do offer fixed rates. If requested, some lenders will structure the first six months of payments as interest only payments, and others won’t.
There are significant cultural and perspective differences between banks and small business owner borrowers. But cultural and customer service differences in how lenders relate and interact with small business owners also greatly differs by bank. Some SBA lenders will make you feel that you need to earn their business, while other SBA lenders will make you feel they are trying to earn yours.
Other common ways SBA lenders differ that can impact your approval, loan amount, acquisition deal structure, and the loan experience you have with the whole process:
Cash Flow
The SBA requires a minimum DSCR (Debt Service Coverage Ratio) of 1.15. DSCR is determined by dividing your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by your total fixed debt service (existing and the proposed SBA loan payments). Many (if not most) SBA lenders require a DSCR higher than what the SBA allows. Typically, SBA lenders will have a minimum DSCR requirement anywhere from 1.25 to 1.75 (some may require higher).
Why does this matter? Because the same borrower with the same net operating income free cash flow would qualify for just over 50% more loan dollars at a 1.15 DSCR than at a 1.75 DSCR. This is the difference of one SBA lender being able to approve your loan for $350,000 and another for $525,000. Or one lender approving at $1 million and another at $1.5 million. With your loan situation it may not matter because there is plenty of free cash flow to get the loan amount you need. For other small business owners, it can mean not getting the loan amount needed or wanted.
Expertise and Current Focus For Your Industry
The differences in SBA lender’s expertise in lending to your industry varies greatly. The more experience a SBA lender has in any industry, the more expertise they build in understanding its nuances. Sometimes this industry experience works towards the borrower’s advantage and sometimes to their disadvantage. Make no mistake, there are many SBA lenders that will dismiss your loan request immediately simply based on the industry you’re in. Your business industry matters to SBA lenders and each lender looks at industries differently. See our industry pages to see the currently ranked top 25 SBA lenders for your industry.
Credit Score
For loans over $350,000, the SBA does not have credit score requirements. The SBA defers to the SBA lenders’ internal credit score policies. SBA lenders minimum credit scores required typically will range from 625 to 680 depending on the lender. Some lenders are able to make exceptions for credit scores that fall below 625 while others are not.
Bankruptcy
While the SBA allows for loans to be made to borrowers who have a previous bankruptcy, many SBA lenders will not do so. Some SBA lenders will consider a prior BK depending on how long ago it was and the circumstances that caused it. Others will reject a borrower that had a BK even if it was 30 years ago.
For more details about qualifying criteria visit our FAQ on Qualifying Criteria.
Loan Amount
While the SBA doesn’t really have a minimum loan amount, some SBA lenders do. Some SBA lenders don’t feel it is worth it to them to go through everything required for a SBA loan if the amount is too low (like $50k, $100k or even $200k). But for other lenders they specifically focus on loans under $350k. While the maximum guarantee the SBA provides goes up to $5 million, over half of SBA lenders have not approved a loan over $1 million.
Years Small Business Has Been Established
The SBA does not define minimum years of experience required and even allows for an existing employee of a business to qualify for a SBA loan (with an equity injection) to purchase that business. Many SBA lenders however are uncomfortable with “startup” loans for an acquisition. Some lenders will consider any new business a startup until they have 2 or 3 years tax returns. It’s easier all around with all SBA lenders when the small business owner’s business has been in existence and profitable for a long time. When the small business has less than 3 years of tax returns some SBA lenders will shy away while others will be barely phased by it.
Collateral
One great thing about SBA loans is that the SBA doesn’t require the lender to take collateral if it doesn’t exist. So if the borrower does not have a house or property available for collateral they can still qualify for a SBA loan. However, some SBA lenders will not approve larger size loans if there is no collateral being applied and more heavily scrutinize a loan of any amount if there isn’t property available for them to take at least a junior lien position on.
The SBA does not require lenders to collateralize loans over $350K with personal property if the borrower has less than 25% equity of fair market value. But some SBA lenders have internal policies where they may require it anyway. The SBA does not have personal property collateral requirements for loans under $350K but some SBA lenders have internal policies that will cause them to require the property as collateral.
For more details about required collateral visit our FAQ on Collateral.
Out-of-State or Relocation
The SBA does not require that a business owner can only acquire a business in their own state to be approved. But different SBA lenders feel differently about expansion loan geographical limitations. Some lenders will only approve acquisition loans when the purchased business is in the same state that the borrower resides. Other SBA lenders don’t even think about this in a negative context and would help the right small business owner expand into about any state.
Acquisition Equity Injection Requirement
The SBA requires a 10% equity injection for acquisition loans. The SBA allows for the equity to be cash, “assets other than cash” and standby seller financing. For business owner’s whose current business can be valued for an amount high enough, this can satisfy the “assets other than cash” requirement, resulting in no cash down payment being made. Some SBA lenders are comfortable with utilizing the “assets other than cash” and some are not. This is another aspect of the importance of the SBA lender you choose knowing your business industry well. SBA lenders that aren’t experienced in acquisition lending or not experts in your specific industry may only allow for 10% in a cash injection or 5% cash and a 5% seller standby note.
For more details about the SBA equity injection requirement visit our FAQ - Equity Injection Rule.
Lender’s Legal Counsel
SBA lenders often utilize lawyers who are SBA experts in advising the lender of the SBA’s SOP policies and intent when eligibility or structure gray areas come up in a loan, and almost always when it is an acquisition loan. These lawyers also vary in their opinions and views on items not explicitly spelled out in the SOP and corresponding SBA issued guidance. This leads to different lenders, who are using different lawyers, approving different loan scenarios in different ways. While lawyers can sometimes differ in their advice on the same issue, all will have a conservative and cautious perspective that is focused on protecting the lender.
The Human Element
Even when a loan passes all of the minimum SBA requirements and those of the bank’s internal policies and requirements, in the end, it’s humans that make the final approval decision. The human element and its impact on how different lenders view different loans is more significant than one might think. Your loan may look good on paper but you’re in an industry the lender isn’t comfortable with or may have just had a recent default with. Each approver and/or committee member has different backgrounds, loan experiences (good and bad), preferences, priorities, and biases. These vary from each other within the same bank, and differ all the more from humans at different banks.
Trying to find the right SBA match can be deflating if you are randomly approaching SBA lenders who have low probabilities of approving your loan.
Did you have a bad first “date” with an SBA lender? Or did you think your first conversation went great, but then you got ghosted?
Small business owners have a lot of options in the SBA lender they use. Just because you reached out to one SBA lender that declined your loan doesn’t necessarily mean another SBA lender wouldn’t approve it.
If you have a loan request that an SBA lender declined, it could be that your loan or situation is just ineligible for an SBA loan, period. But often times, it just means it wasn’t the right SBA match for you. You may qualify for an SBA loan, you just didn’t apply with the right matched lender.
Use SBAmatch to find the current top ranked SBA lenders for your specific industry, loan amount range, franchise brand, and for lending to businesses like yours in your state. Just like small businesses, SBA lenders are different from each other. SBAmatch helps small business owners to find the right match for your SBA loan.
