Securing an SBA 7(a) loan can make or break your chance to acquire a business. Often, the reason you don't get funding isn't due to you or the business you're trying to buy—it's about how well the deal fits with a specific bank. A poor borrower-banker fit will result in higher interest rates, a worse debt service coverage ratio, and a longer time to close.
The optimal SBA loan process follows a fairly consistent protocol, and I'm open-sourcing it now for any searcher who wants the best interest rate and to close quickly.
The SBA 7(a) loan
The SBA 7(a) loan is designed to provide small businesses with low-interest loans up to $5 million. These loans can be used for a variety of purposes, but for this discussion, we'll focus on business acquisition loans. The application process is complex and can take between 45 to 90 days from start to finish. Banks underwrite 80% of the loan based on the business's cash flows and 20% based on the borrower's fit as the new operator plus their financial history.
To mitigate lender risk and promote economic growth, the US government backs 75% of these loans. Banks often sell the SBA guarantee portion on the secondary market as a "high-interest bond," keeping the remaining 25% of the loan on their books. Interestingly, new or smaller banks often offer the best terms because they're aggressive in acquiring more loans, unlike the top 10 SBA lenders who have more leverage. All banks require the same essential documents to underwrite the loan:
Last 3 years of tax returns for the business
Last year's tax returns for the buyer
Last 3 years profit and loss statements and balance sheets
Interim financials for the current year
Personal financial statement
Active LOI with seller
Screenshot of your credit score
Your resume
Borrower-banker fit
The primary reason most people get rejected or receive worse interest rates is a mismatch with the bank. Banks specialize in specific industries, loan sizes, and regions. For example, First Children's Finance only lends to child daycare services, and Shoreham Bank specializes in larger deals with an average loan size of $2.7 million. Finding the right lender for your deal is crucial. That’s why Dealwise [https://godealwise.com/beacon] connects you to 10 personalized banks and lets you send your application to all of them with one click.
In order to get the best rate, it’s beneficial to shop around your loan. The first term sheet you receive from a bank will almost never be the best price. All interest rates are negotiable. For example, once you get a quote from one lender, you can take it to another and have them beat it, then take it to another lender and have them beat it again, then take it back the first lender and continue the process until banks can’t go any lower. Based on RisMedia, buyers who shop around a loan save over $84k over the life of the loan. The downside is that this takes a lot of manual work, even with a loan broker. However at Dealwise [https://godealwise.com/beacon], we’ve automated this process so you can save time and money.
The Underwriting Process
Here’s a high-level overview of the underwriting process:
Introduction: The Business Development Officer or BDO may contact you to understand your application better and educate you on the SBA loan process.
Pre-LOI: The BDO performs pre-underwriting and issues a term sheet outlining potential loan terms (non-binding).
Signed LOI: Once you sign the term sheet, a goodwill deposit is required to cover costs if you decide to switch lenders (refundable if the bank rejects the loan).
Underwriting: The application then goes through underwriting and is reviewed by the credit team (about 7-10 business days).
Closing: After the bank's approval, the closing process takes about###-###-#### days, including document audits and third-party appraisals.
This entire process can take 30 to 90 days, which is critical if your LOI exclusivity window is 90 days. To reduce the risk of your loan falling through 45 days into your exclusivity window, Dealwise [https://godealwise.com/beacon] accelerates the process. Instead of simply sending your application to a BDO like a loan broker, we partner with banks that offer the fastest closing times and with the best rates.
Post-Closing
Congratulations! You've secured your SBA loan and can now acquire your company. Some banks may require quarterly audits to ensure you’re in good standing and not making unauthorized payments (like sending payments to the seller while it's on standby, which is a soft default).
From start to finish, the process typically takes###-###-#### days. And just like that, you're the owner of a new business.
P.S. you can check our website out here: https://godealwise.com/beacon
1) While it's true that banks don't like to compete on interest rates because they make less money, every bank is willing and already does compete on interest rates because that's how they can win deals. It’s straightforward to see if going to a bank with a 1% lower interest rate can save you $100k over the term of the loan. For example, if you go to a lender and say, "I have a term sheet from another bank at 9.5% interest, can you beat it?" They will give you a yes or no decision right there because they have a benchmark.
2) There are cases where deals fall through, but those are edge cases. For 99% of borrowers, the term sheet they sign is the one that gets underwritten. No bank will issue a term sheet they can't underwrite because of regulations and general bad business practices. After a few times, that bank will be known for setting false expectations, and people will stop going to them.