Community banks are the lender of choice for small businesses, according to the Federal Reserve Small Business Credit Survey. Then why are so many community banks missing an important small business lending tool? Interest in Small Business Administration (SBA) loans is very high right now, but far too few community banks offer them.
Many community lenders are concerned that SBA loans take too much time and effort. We’d like to address this misperception to show community bankers there’s nothing to fear – and a lot to gain.
How Long Do SBA Loans Take?
We’re always up front with lenders and borrowers that SBA loans can take longer than conventional business loans for two key reasons.
- The documentation requirements for SBA loans tends to be greater.
- There is an additional party involved – the SBA – that needs to analyze and approve the loan request.
But, don’t take this to mean that SBA loans always take a long time. Many parts of the SBA loan process can be optimized for speed and efficiency, particularly when a lender works with an experienced SBA lender service provider. One of the most important and basic things a lender can do to positively impact the timeline is to simply follow the standard operating procedures set forth by the SBA. A common mistake is to try and follow the bank’s traditional loan policy when underwriting SBA loans, and this inevitably leads to questions, delays, and more work down the line.
As a general rule of thumb, when the process is followed correctly, we tell lenders that an SBA loan can be funded approximately 120 days from the first meeting with a borrower. Of course, the timeline can be affected by surges in demand. For example, when the SBA rolled out new business emergency funding programs during the pandemic, the timelines were longer.
Here’s an overview of the loan process you could expect working with VITAL.
- Determine eligibility. When you think you may have a candidate for an SBA loan, get VITAL involved as early as possible
- Loan structure. VITAL helps the lender structure the loan and underwrite to SBA standards
- Forms and documentation. VITAL and the lender work with the borrower to complete the required SBA forms and VITAL provides a checklist of the financial statements and documents needed to support the loan request.
Lender approval. The lender submits the loan for bank approval per institution policy.
- SBA approval. VITAL packages and submits the loan request to the SBA and works with the lender and borrower to answer SBA questions as needed. Upon approval, a loan authorization from the SBA is issued.
Loan closing. The lender closes the loan in accordance with the SBA authorization with assistance from VITAL.
Is an SBA Loan Worth the Extra Time?
You may still be wondering: are SBA loans worth the extra time and effort?
We believe the answer is a resounding yes, and here is why the community bankers we work with agree.
- SBA loans are a valuable lending option for small business customers. For business borrowers, SBA loans are one of the lowest-cost options for long-term financing and they can be used for a wide array of purposes. The SBA guarantee allows banks to extend credit to underserved business customers that can’t meet collateral requirements or need start-up financing.
- SBA loans allow community banks to expand and diversify the business customers they serve. Many small businesses struggle with access to credit, and women-owned and minority-owned businesses often face even bigger barriers. Support from an SBA guarantee allows banks to safely lend to organizations that fall outside of their conventional loan policies to provide wider support for Main Street businesses.
- SBA loans can strengthen a bank’s income statement and increase liquidity. There are practical and compelling bank performance reasons for making SBA loans. For the reasons listed above, a bank can safely expand its loan volume and penetrate new markets, and compound gains through the sale of the loan guarantee on the active secondary market. The premium generates high amounts of noninterest income that increases a bank’s liquidity and allows it to make more loans.