A Dozen Ways SBA Lenders Differ
A Dozen Ways SBA Lenders Differ
From our experience, the biggest misperception by far 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.
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.
Here are a dozen common ways SBA lenders differ which can impact your approval, loan amount, acquisition deal structure, and the loan experience you have with the whole process. Or, to put another way, here are 12 more reasons why if you want to be smart about your business loan then it's best to think inside the LoanBox.
12 Primary Ways SBA Lenders Differ From Each Other:
Criteria - Bank policies vary from bank to bank. Qualifying criteria minimums and ratios vary. One lender may have a hard ceiling at 30% DTI, another at 40%. One may have a LTV at 75% and another at 85%. One may have a DSC of 1.15 and another at 1.75. These are just 3 ratios which while these examples seem pretty close, thousands of borrowers don't qualify with one lender where they would be approved with another.
Rates - 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.
Culture - 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.
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.
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.
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.
Credit Score - For loans over $500,000, 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.
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.
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.
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.
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.
Business Age - 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.
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. You don't have to throw darts and hope for the best. You don't need a crystal ball to figure it all out. You just need LoanBox. Simple.
This article is authored by Darin Manis, founder of LoanBox.