For Lenders

Why should our bank incorporate SBA and USDA guaranteed loan programs as part of our commercial lending strategy?

There is a strong case to be made for lenders using SBA and USDA loan programs. We see the following as key reasons:

  • It helps community lenders serve a larger, more diverse pool of businesses and commercial borrowers. Read more here.
  • When used to extend credit to more C&I businesses, it helps to diversify portfolios and avoid over-concentration in commercial real estate. Read more here.
  • It creates a valuable source of non-interest income when selling the guaranteed portion of the loan. Read more here.
  • It allows banks to significantly expand commercial lending volume and increase overall profitability without adding any fixed expense. Read more here.
Are only a select group of businesses eligible for SBA loans?

To the contrary, most small, for-profit businesses are eligible for SBA loans. They aren’t just for small start-ups! Primarily, eligible businesses must meet the following criteria:

  • Be located in the U.S.
  • Operate for-profit in an eligible industry (the list of ineligible business types is relatively short.)
  • Have owner equity in the business.
  • Meet size requirements, which vary by industry and can be quite large.

VITAL provides lenders with complete eligibility guidance, and conducts a thorough borrower review up-front to save valuable time.

Which borrowers are eligible for USDA loans?

The USDA offers programs for businesses, not-for-profits, and public entities operating in rural areas. Rural areas are defined as having a population of less than 50,000 (size requirements vary by program) and not connected to a metro. As with SBA loans, VITAL provides lenders with complete eligibility guidance, and conducts a thorough review up-front to save valuable time.

Can my bank participate in USDA loan programs if we are not located in a rural area?

Yes, as long as the borrowing entity is located in an area that meets USDA eligibility requirements. If your bank serves rural areas, participating in USDA community development programs can make you an important lifeline lender.

Do all loans require a personal guarantee?

Any loan the SBA guarantees requires at least one personal guarantor and a personal guarantee from all owners of 20% or more of the borrowing entity. The USDA follows this guideline with a couple of notable exceptions, such as loans to co-ops or publicly-traded companies, but the exceptions are limited. Contact VITAL for more information about exempt situations. 

Can a business obtain a guarantee for their loan without sufficient collateral?

Yes for the SBA, and no for the USDA.

For the SBA, the loan amount is determined by borrower need and the ability to repay the loan. The SBA will take all available collateral. If all available collateral is insufficient to secure the loan on a liquidated basis, the borrower can still obtain the loan.

For loans guaranteed through the USDA, the loan amount Is determined by the collateral as well as the borrower’s ability to repay the loan. The USDA will not guarantee a loan without sufficient collateral. 

Does a borrower need to put a second mortgage on his or her home?

Regarding the SBA, if there isn’t enough collateral to secure the loan on a liquidated basis, the borrower will need to provide a secured personal guarantee. This means they will need to pledge personal real estate, but only to the extent that they are short on collateral.

USDA loans must have sufficient collateral to cover the requested loan on a liquidated basis to be eligible for a guarantee. The lender’s normal lending guidelines regarding collecting secured guarantees from borrowers will be the deciding factor. 

Can the guaranteed portion of the loan be sold in secondary market?

Yes, for both SBA and USDA loans! Many banks use this strategy to produce noninterest income, and collect it in the same year the loan is sold. Banks with a high loan-to-deposit ratio can sell the guaranteed portion of loans as a method to manage their outstanding loan balances. 

Are companies that are highly leveraged or have a negative worth still eligible?

Yes, the SBA will still guarantee a loan to a borrower who is highly leveraged or has a negative net worth, provided a reasonable likelihood of repayment is established. The SBA has no leverage guidelines for borrowers.

The USDA has a requirement for the borrower to have a 10% tangible net worth if the business has been in operation for 24 months or more. If the borrower has had operations of less than 24 months, the tangible net worth requirement is 20%. Contact VITAL for a further explanation of the USDA requirements. 

What are the maximum terms on guaranteed loans?

Up to 25 years for an SBA loan secured by real estate, 10 years on everything else. Up to 30 years for a USDA Business & Industry loan secured by real estate, up to 10 years for a loan secured with equipment, and up to 7 years for a loan secured by working capital assets. Other USDA programs, such as Community Facilities and 538 Multi-Family Housing can have longer terms, if the useful life of the project supports it.

What are the interest rates?

The SBA sets maximum rates lenders can charge. The specific rate will be determined by the lender, not to exceed SBA maximums.

The USDA has no set benchmarks, but requires that the rate be “reasonable." At VITAL, we follow the SBA guidelines when pricing our USDA loans.  

What is the interest rate adjustment period?

For the SBA, the pricing can adjust monthly, quarterly, annually, every 3 years, or every 5 years. All of the prior mentioned adjustment periods constitute a variable rate loan. A fixed rate loan is exactly that: fixed for the life of the loan with no rate adjustments possible.

The USDA will allow the adjustment period to be set by negotiation between the lender and the borrower.

For lenders interested in selling the guaranteed portion, the secondary market prefers a monthly or quarterly adjustment period.

SBA FAQs for Borrowers

What is an SBA loan?

The U.S. Small Administration (SBA) offers a variety of loan programs to help small businesses with access to affordable credit when they don’t qualify for a conventional bank loan. There are a number of reasons small businesses may be unable to get a conventional loan, such as not having enough collateral, being a start-up without a proven business history, or needing to finance working capital.

The SBA does not directly provide funding. Instead, it partners with lenders to offer a “guarantee” to offset the additional risks.

Am I eligible for an SBA loan?

Most small, for-profit businesses are eligible for SBA loans. VITAL will provide borrowers with eligibility guidance, but primarily, a business must meet the following criteria:

  • Be located in the U.S.
  • Operate for-profit in an eligible industry (the list of ineligible business types is relatively short.)
  • Have owner equity in the business.
  • Meet size requirements.
Are there different types of SBA loans?

Yes, the SBA offers several different financial programs with different criteria. The most commonly used is the SBA 7(a) program. You can read more about SBA programs on our Loan Programs page.

What are the benefits of SBA loans?

SBA loans offer businesses some important advantages that include:

  • Lower collateral requirements.
  • Lower down payments.
  • Extended terms, which can lower monthly payments and improve cash flow.
  • The ability to finance working capital and intangible items.
  • Access to up to $5 million in funding.
Can I get an SBA loan for working capital?

Yes, one of the key advantages of SBA loans is the ability to fund the day-to-day activities of your business, such as rent, raw materials, inventory, payroll and marketing. An SBA loan requires less collateral than a conventional business loan.

What collateral is required?

Where a conventional business loan is typically secured with property, equipment, equity, or personal assets, an SBA loan can have lower collateral requirements because of the backing from the U.S. government. The amount of collateral required is ultimately determined by the lender. With an SBA loan, a business will still need to demonstrate it has “skin in the game.”

Can I refinance my existing debt with an SBA loan?

Yes. Many businesses use SBA loans to restructure their debt because the combination of longer terms and competitive interest rates often significantly lower their monthly payments and improve cash flow. After refinancing with the SBA, many businesses are actually able to pay for more things with cash going forward and avoid overextending credit. A business can consolidate and refinance existing debt in conjunction with a new loan, or just refinance existing debt at more favorable terms.

Is a down payment required?

The SBA requires a minimum down payment of 10%. The final amount of the down payment will also be determined by the requirements of the lender making the loan.

Do I need to provide a personal guarantee?

Any loan the SBA guarantees requires at least one personal guarantor and a personal guarantee from all owners of 20% or more of the borrowing entity.

How do I apply for an SBA loan?

The SBA doesn’t lend money directly to businesses; instead, it partners with lenders. A business must apply for an SBA loan through an experienced lender. VITAL is a “lender service provider” that carries out the SBA lending process on behalf of a network of reputable community banks experienced in making SBA loans. To learn about starting an SBA application, please contact us for an initial consultation.

What can I expect during the SBA loan process?

Underwriting SBA loans follows a process similar to conventional business loans, and includes items such as reviewing a business plan, collecting financial documents, and conducting a credit analysis. Because VITAL specializes in SBA loans, we have developed a smooth and efficient process. You can learn more at the SBA loan process for borrowers.  

Can I receive more than one SBA loan?

A borrower can receive multiple SBA loans as long as they don’t exceed the SBA lending limit of $5 million at any given time.

USDA FAQs for Borrowers

What is a USDA loan?

Similar to the SBA, loan programs through the U.S. Department of Agriculture are designed to provide access to affordable credit, but with a specific focus on rural areas. The USDA has different programs for businesses of all sizes, not-for-profits, and public entities. Like the SBA, the USDA partners with lenders to offer a loan guarantee. For some purposes, borrowers may also be eligible to receive grants or low-interest direct loans from the USDA.

Am I eligible for a USDA Business & Industry Loan?

VITAL will provide borrowers with eligibility guidance, but generally, a business must:

  • Be located in an area in the U.S. with a population of 50,000 or less that is not connected to a metro (i.e., not a suburb).
  • Demonstrate that loan funds will be used for eligible purposes within the U.S.
  • Have a good credit history and demonstrate the realistic ability of repayment.
  • Have a tangible balance sheet equity position of 10% or more for existing businesses, or 20% or more for new businesses.
Are there different types of USDA loans?

Yes, the USDA offers financial programs for businesses, not-for-profits, and public entities operating in rural areas. You can read more about different USDA programs that may applicable to you on our Loan Programs page.

What are the benefits of USDA loans?

While the benefits of USDA financing can vary by program, common benefits include:

  • Access to large amounts of capital.
  • Long-term financing that provides manageable repayment.
  • Reasonable interest rates. Particularly competitive blended rates can be achieved when combining USDA grants, USDA direct loans, and other federal/state funding resources where applicable.
Is collateral required?

USDA loans typically require collateral equal to the loan amount.

Do I need to provide a personal guarantee?

All business owners, partners, and shareholders with a 20% or greater interest in the business are required to personally guarantee the loan.

How do I apply for a USDA loan?

For businesses, the first step is to contact a lender that understands USDA guaranteed loans. VITAL can connect you with an experienced lender that is the right fit for your needs. We’ll guide you through the process from there.

For public entities and not-for-profits, most USDA programs require an eligible borrower to complete an application to begin the process. VITAL will work with you and the appropriate state USDA officials to provide guidance, ensure accurate completion of the application, and save valuable time.

Why should public entities consider USDA financing?

USDA programs are designed to help small and rural communities with specific community development challenges, such as water and wastewater systems, constructing public facilities, housing, broadband, and renewable energy. The financing options have many attractive features, including longer terms that offer manageable debt repayment.

Sometimes, combining USDA financing with other funding sources produces the most cost-effective solution. A consultation with VITAL can help to determine the smartest approach for your specific needs. Contact us any time to discuss your project.