The SBA Credit Scoring Process that business owners must understand.
When the government lends money to individuals, it usually doesn't do it directly. Instead, it guarantees those loans issued by banks, credit unions and other private lenders. This guarantee protects the lender if the borrower fails to repay the loan.
The U.S. Small Business Administration (SBA) doesn't hand out money to just any business or individual that asks. The SBA processes your loan to verify key repayment securities. On test is to run your credit with most all reporting the credit report came from Experian. The SBA doesn't actually hand over US Federal Taxpayer dollars as your loan. The SBA uses established banks, investment lenders, credit unions and many other types of lenders to get you the money you seek. The SBA simply offers a loan guarantee to these lenders. The guarantee reduces the risk to the investment lenders with US Taxpayer dollars picking up the tab for any failed or defaulted loans. Most loans are covered up to 75% to 100% of the total loan amount plus interest that would have been earned for the maturity of the loan.
The SBA loan processing department will test your eligibility for a SBA 7(a) or SBA 7(b) Disaster loan starting with a simple Experian credit check.
We do find exceptions as in the CARES Act but this is not the normal process and the SBA OIG can and will suggest to return to standard operating procedure if risk increases because of processing procedures that have been modified or relaxed.
From the SBA SOP 50 10 5 (F) Subpart B Chapters 4, 5, 6 we find if the borrower has an acceptable SBA credit score but not the minimum score which is estimated to be between 350 to 570 and depends on other supporting documents to approve a loan based on low credit scores. If this is the case what additional screening needs to take place? What other documents should be reviewed to approve a loan?
In addition to good credit scores lenders screening the borrower should collected from the borrower:
- Business history summary.
- Description of the current management team.
- Principle owners and guarantor review should include personal financial statements that are consistent in size with other similar businesses non-SBA loans.
- Business tax returns and verification and reconciliation of borrowers financial data as compared to income tax data collected from IRS Form 4506-T.
- A determination of the equity and the proforma debt to worth are within acceptable ranges based on comparison to similar business size when processing a non-SBA commercial loan.
- Collateral with estimated current market value using quick sale margins.
- Any adverse business conditions that could effect the ability to repay the loan.
There are minimum requirements which are practiced during each loan review. The SBA does not restrict the review for eligibility to just these standard checks and balances. If a borrower supplies additional information for analysis in an effort to establish funding and eligibility the SBA will accept the additional information.
In some cases of Economic Injury Disaster Loans we have found during the analysis for reasonable repayment assurances may be denied even if the borrower has good credit. During the screening both credit score and additional review of ability to repay must be practiced and often is based even on industry type. Additional documentation will be required when filing for reconsideration of the loan application.
If additional financials are required you should provide current financials within 180 days.
In some cases a non-owner spouse may offer personal financial statements to strengthen your loan application approval. Most times these are for special purpose loans which would be detailed and secured with your business and personal guarantee as indicated in the note.
Review of joint personal financial statements can offer a clearer picture of combined capital cash flow and collateral.
When you submit your application, reconsideration or appeal for reconsideration you should always include the following documents, some are linked to online resources for your convenience.