Stories of SBA loan surprises?

December 12, 2021

by an investor from University of Oxford in San Francisco, CA, USA

Keep hearing a surprising proportion of searchers struggle to get deals approved for the SBA 7a loan program and are often shocked by the restrictions wastefully late in their process. Seems like a great opportunity for folks to share and learn.
So who has a good source for the core criteria for a successful application? And who has some war stories to share on the more surprising ways deals fall foul of the SBA either pre or post-approval?

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Reply by a searcher
from Texas A&M University in Johnson City, TN, USA

There is a difference between bank underwriting rules vs SBA rules. If a lender passes due to their underwriting, ask if they recommend anyone else that has different underwriting criteria.

For me, Customer Concentration rules were important- not just for 7a, but for 504 on the CRE too. In my case, I was only after a 504 for the CRE. If the business doesn't meet underwriting criteria of the Bank, they probably also won't fund the CRE, which was a surprise to me (surprise, since rent coverage seemed clearly there, and I was adding a PG for the CRE, and SBA would have been taking most of risk away anyway).

I ended up going conventional CRE loan (20% down) for speed- trying to close (right now) before EOY was important to Seller. I did end up with one SBA 504 lender that had no issue with the concentration, but SBA wasn't going to be fast enough.

Worth noting that another surprise was the down payment %. SBA wanted 15% down on the 504 (vs 10% down), based on the point that I did not have direct experience running this exact business. Same industry experience did not count. At that point, SBA vs conventional advantage was starting to disappear anyway. Apparently a 2 year look back on this, so I can refi at 10% down using 504 after 2 years. A positive surprise is that the SBA will allow you to borrow some of the down payment (at least for 504, like personal loan, etc), as long as debt coverage is there.

Unfortunately, based on this experience (and nuance to the issue I had), I'd say you're just going to have to get your deal ready for the banks and have backup plans if you first choice(s) pass!

Reply by a lender
from University of Wisconsin in Minneapolis, MN, USA

The Buzz word for banks is typically that they are a "preferred" SBA Bank. At the bare minimum you want to use a preferred bank, but what people don't know is a bank can be preferred, but the individual lender your talking may still not be familiar with nuances of the SBA. The preferred status doesn't make the individual you are talking to an expert. I have seen several times where the bank is preferred but the individual lender only does 1 SBA deal a year. You really need to go one step further and work with an experienced SBA lender who primarily finances M&A deals. A few traps that unknowing lenders run into are seller earnouts (SBA does not want earnouts), seller involvement after sale (Seller is not allowed to maintain ownership and can only be a consultant for 12 months), and potential lease hurdles (ideally the length of lease plus options covers the proposed term of the loan, with some exceptions ). When I talk to prospects I tell them to get me involved before the submission of the LOI so the deal is structured properly on the front end. If you get an LOI accepted with an earnout component and then start talking to banks about SBA options that is where some of the challenges can occur. Many of us are trying to change the reputation of the SBA process. Most of my deals close between###-###-#### days. There are always outliers, but that should be the exception and not the rule.

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