4 Minutes Read.
Loans guaranteed by the Small Business Administration (SBA) are a valuable source of capital for many growing businesses. Small business lending software can now incorporate automated underwriting to make their SBA lending faster, more customer-friendly and more profitable than ever before.
A brief overview of SBA lending
The U.S. Small Business Administration works with banks and other lenders to provide loans to small businesses, ranging from as little as $500 up to $5.5 million. In general, there are four requirements that a small business must meet to qualify for an SBA-guaranteed loan:
- It must be a legally registered, for-profit business.
- The business must be located within the U.S. or a U.S. territory.
- Business owners must have their own equity invested in the business.
- The business must exhaust all other funding options.
In addition, there are a number of specific requirements for each type of loan and borrower. SBA lenders also have their own requirements. This is why the SBA recommends that businesses consult with lenders before applying for SBA loans.
There are three basic types of SBA loans. 7a loans are the most popular and can be as high as $5 million. For loan amounts below $150,000, the SBA guarantees 85 percent of the loan amount. For loans larger than $150,000 and up to $5 million, the SBA guarantees 75 percent of the loan amount.
Besides 7a loans, the SBA also offers a capital line of credit for exporters and the 504 loan, which is used specifically for real estate or machinery and equipment purchases.
How SBA requirements affect the underwriting process
The SBA requirements for small business loans affect the underwriting process in two ways. First, because SBA loan applicants must exhaust all other possible funding sources, many customers have poor or little credit history. This makes underwriting more challenging.
Secondly, the SBA imposes a number of additional documentation requirements, which vary with the type of loan. There are 17 main requirements for SBA loans, some of which involve multiple documents.
For example, a borrower must submit three years of personal and business tax returns, resumes of all business principals, and detailed descriptions of both the purpose of the funds and the use of the owner’s equity injection.
Managing this array of paperwork can be frustrating and time-consuming for both the borrower and the lender. This is why for many small businesses, automating the underwriting process is an attractive option.
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Automated underwriting enhances SBA procedures
Automated underwriting, also offered by MonJa, is ideal for managing the complexity of SBA guaranteed loans. With the right software, a lender can process small business loans more efficiently, turning what was once an unattractive part of the lending business into a valuable profit center.
Some features of automated underwriting solutions include:
- Application assessment and sorting – An automated system can quickly determine whether applications satisfy SBA and lender requirements, and sort incoming applications according to priorities determined by the lender. For example, lenders might want to prioritize returning borrowers over new customers. Likewise, applications with complications can be instantly identified and flagged by the system.
- Document gathering – With interfaces to the SBA and the customer’s bank records, an automated system can gather much of the required documentation without human intervention. When documents are incomplete, the system can automatically notify the customer to supply the required information.
- Fully automated underwriting and decision processes – For applications that meet documentation requirements, an automated system can complete the underwriting process accurately and instantaneously. Automated systems can use lenders’ specific underwriting criteria to calculate figures such as cash flow and financial ratios.
- Fast closing and disbursement – An automated system can create a credit memo and other documentation as soon as it finishes the underwriting process. Subsequently, loan disbursements can automatically be transferred to the customer’s account.
- Simplifying audit and compliance – The data management capabilities of automated systems further reduce costly administrative time by compiling customer files and making them accessible for SBA reporting and compliance requirements.
With the right small business lending software, serving borrowers of small loans is transformed from a low-return, time-consuming business into an efficient and profitable one.