SBA Third Party Lender Agreement: A Guide for Small Business Owners

The Small Business Administration (SBA) plays a pivotal role in facilitating access to capital for small businesses across the United States.

At the heart of this effort lies the SBA Third Party Lender Agreement, a critical document that governs the relationship between the SBA and participating lenders. This agreement forms the foundation of SBA-backed loan programs, enabling small businesses to secure financing that might otherwise be out of reach.

The SBA Third Party Lender Agreement includes specific guidelines set forth in the SBA Loan Authorization for documentation, approval, and action records during loan actions.

Understanding SBA Loans

What is an SBA Loan?

An SBA loan is a financial product designed to support small businesses in the United States, facilitated by the Small Business Administration (SBA). Unlike traditional loans, the SBA does not directly lend money to businesses. Instead, it provides a guarantee to lenders, covering a significant portion of the loan amount—typically between 50% and 85%. This guarantee reduces the risk for lenders, making it easier for small businesses to access the capital they need to grow and thrive.

SBA loans are particularly attractive to small business owners due to their favorable terms. These loans often come with lower interest rates and longer repayment periods compared to conventional loans. For instance, SBA loans can offer repayment terms of up to 10 years for working capital and up to 25 years for real estate purchases. This flexibility can significantly improve a business’s cash flow, allowing owners to invest more in their operations and less in monthly loan payments.

The Small Business Administration’s involvement ensures that more small businesses, including those that might not qualify for traditional financing, have the opportunity to secure the funding they need. This support is crucial for fostering entrepreneurship and economic growth across the country.

Understanding the SBA Third Party Lender Agreement

The SBA Third Party Lender Agreement is a legally binding contract between the SBA and financial institutions that wish to participate in SBA loan programs. This agreement outlines the terms, conditions, and responsibilities of lenders when originating, servicing, and liquidating SBA-guaranteed loans. Lenders must obtain prior approval from the SBA for non-routine litigation, which includes cases with disputed factual or legal issues, high legal fees, or conflicts of interest involving lenders and the SBA.

Key Components of the Agreement

1. Default and Liquidation Procedures: The agreement specifies the steps lenders must take in case of loan defaults and the process for liquidating collateral if necessary. Lenders are required to notify the SBA of any loan default within 45 calendar days of the default date. In the case of a defaulted SBA loan, it is crucial for lenders to maintain thorough documentation and follow specific steps, including liquidation of collateral and meeting reporting requirements to the SBA.

Importance for Small Business Owners

While small business owners are not direct parties to the SBA Third Party Lender Agreement, understanding its basics is crucial for several reasons:

1. Access to Capital: The agreement facilitates the availability of SBA-backed loans, providing small businesses with access to capital that might otherwise be unavailable. In FY 2023, SBA-backed loans supported over 750,000 jobs across the United States, demonstrating their significant impact on the economy.

2. Favorable Loan Terms: SBA loans often come with more favorable terms compared to conventional loans. For instance, SBA loans typically offer longer repayment terms: up to 10 years for working capital and up to 25 years for real estate.

3. Understanding Lender Obligations: Knowing what lenders are required to do under the agreement can help business owners navigate the loan process more effectively and understand their rights and responsibilities as borrowers.

Benefits and Responsibilities for Third Party Lenders

Participating in SBA loan programs offers significant advantages for lenders, but it also comes with specific responsibilities and obligations.

Benefits for Lenders

1. Reduced Risk: The SBA guarantee significantly reduces the risk for lenders. With the SBA backing up to 85% of the loan amount, lenders can extend credit to businesses that might not qualify for conventional loans.

2. Expanded Customer Base: By offering SBA loans, lenders can attract a broader range of small business customers. In FY 2023, 32% of SBA 7(a) loans went to minority-owned businesses, indicating the program’s role in promoting financial inclusion.

3. Competitive Advantage: Lenders who become proficient in SBA lending can differentiate themselves in the market. The SBA’s Preferred Lenders Program (PLP) allows experienced lenders to enjoy streamlined processing of loan applications. In FY 2023, PLP lenders accounted for approximately 70% of all SBA 7(a) loans.

4. Cross-Selling Opportunities: Lenders who actively participate in SBA loan programs often see increased opportunities for cross-selling other banking products and services to their small business clients.

Responsibilities and Obligations

1. Compliance with SBA Regulations: Lenders must adhere to SBA’s Standard Operating Procedures (SOPs) for loan origination, servicing, and liquidation. This includes maintaining complete loan files and providing them to the SBA upon request for review.

2. Underwriting and Credit Analysis: Lenders are responsible for conducting thorough credit analyses and ensuring that borrowers meet SBA eligibility criteria. This includes verifying that borrowers have exhausted other financing options, known as the “credit elsewhere” test.

3. Loan Servicing: Lenders must actively monitor and service SBA loans throughout their lifecycle. This includes tracking payments, managing collateral, and addressing any issues that arise during the loan term.

4. Reporting Requirements: The SBA requires lenders to report on the status of SBA-guaranteed loans through various SBA forms and electronic reporting systems. Timely and accurate reporting is crucial for maintaining good standing with the SBA.

5. Default Management and Liquidation: In case of loan defaults, lenders must take all reasonable steps to maximize recovery. This includes developing and implementing liquidation plans when necessary. Lenders must obtain SBA approval before initiating foreclosure proceedings on real property collateral.

6. Ongoing Training and Education: Successful SBA lenders often invest in ongoing training for their staff to stay updated on SBA policies and procedures. The SBA offers free training resources for lenders, including webinars and online courses.

Impact on Small Business Owners

The SBA Third Party Lender Agreement has far-reaching implications for small business owners seeking financing. Understanding these impacts can help entrepreneurs make informed decisions about their funding options.

Increased Access to Capital

One of the most significant benefits of the SBA Third Party Lender Agreement is the increased availability of capital for small businesses. By providing guarantees to lenders, the SBA encourages them to extend credit to businesses that might not qualify for conventional loans.

• In FY 2023, the SBA approved over 57,300 7(a) loans, totaling more than $27.5 billion. Source

• The average 7(a) loan size in FY 2023 was approximately $480,000, making substantial amounts of capital accessible to small businesses. Source

This increased access to capital has a direct impact on job creation and economic growth. In FY 2023, SBA-backed loans supported over 750,000 jobs across the United States. Source

Favorable Loan Terms

SBA loans often come with more favorable terms compared to conventional loans, thanks to the guarantees provided under the Third Party Lender Agreement. These favorable terms can significantly impact a small business’s financial health and growth prospects.

1. Longer Repayment Terms: SBA loans typically offer longer repayment periods than conventional loans:

   • Up to 10 years for working capital

   • Up to 25 years for real estate Source

   These extended terms can result in lower monthly payments, improving cash flow for small businesses.

2. Competitive Interest Rates: While interest rates on SBA loans are negotiated between the borrower and the lender, they are subject to SBA maximums. This often results in more competitive rates compared to other financing options, especially for businesses that might be considered higher risk.

3. Lower Down Payments: SBA loans often have lower down payment requirements compared to conventional loans, typically ranging from 10% to 20%. Source This can make it easier for small businesses to access the capital they need without depleting their cash reserves.

Support for Underserved Communities

The SBA Third Party Lender Agreement has played a crucial role in expanding access to capital for underserved communities. This impact is evident in the following statistics:

• In FY 2023, 32% of SBA 7(a) loans went to minority-owned businesses. Source

• The number of SBA-backed loans to Black-owned businesses has more than doubled since 2020. Source

• The SBA backed $3 billion in loans to Latino-owned businesses in FY 2023, a record-breaking high. Source

• Loans to Native-owned small businesses are up 70% and total loan dollars have nearly doubled since 2020. Source

These statistics demonstrate the SBA’s commitment to promoting financial inclusion and supporting diverse small business owners.

Potential Challenges and Considerations

While the SBA Third Party Lender Agreement offers numerous benefits, small business owners should also be aware of potential challenges:

1. Stringent Eligibility Requirements: SBA loans often have strict eligibility criteria. Businesses must meet specific size standards, demonstrate good character, and prove their ability to repay the loan.

2. Extensive Documentation: The application process for SBA loans can be more complex and require more documentation compared to conventional loans. Small business owners should be prepared to provide detailed financial statements, business plans, and other supporting documents.

3. Longer Processing Times: While the SBA has made efforts to streamline its processes, SBA loans can still take longer to process compared to some other financing options. The SBA Express loan program offers a faster turnaround time (36 hours) for SBA review, but this is limited to loans up to $500,000. Source

4. Personal Guarantee Requirement: Most SBA loans require a personal guarantee from owners with 20% or more ownership in the business. This means personal assets could be at risk if the business defaults on the loan.

5. Restrictions on Use of Funds: SBA loans come with specific guidelines on how the funds can be used. While they can be used for various purposes, including working capital, equipment purchases, real estate acquisition, and debt refinancing, there are restrictions on certain uses, such as speculative real estate investments.

6. SBA Loan Default: Understanding the process by which a loan becomes an SBA loan default is crucial. If a business fails to make payments, the loan can become defaulted, leading to severe consequences. Proactive measures, such as seeking legal advice or exploring an offer in compromise, can help manage debt effectively.

The SBA Third Party Lender Agreement Process

Understanding the process of becoming an SBA-approved lender and maintaining that status is crucial for financial institutions looking to participate in SBA loan programs. This knowledge is also valuable for small business owners as it provides insight into the rigorous standards lenders must meet to offer SBA-backed loans.

Application and Approval Procedures for Lenders

1. Eligibility Assessment: Financial institutions must first determine if they meet the SBA’s eligibility criteria. To become an SBA lender, institutions must:

   • Be in good standing with state and federal regulators

   • Have a satisfactory record of performance with small business loans

   • Demonstrate the ability to properly originate, service, and liquidate SBA loans Source

2. Application Submission: Eligible institutions must submit an application to the SBA, which includes:

   • SBA Form 750, the Loan Guaranty Agreement (for 7(a) loans)

   • SBA Form 2287, Third Party Lender Agreement (for 504 loans)

   • Supporting documentation demonstrating the institution’s ability to participate in SBA programs

3. SBA Review: The SBA reviews the application and supporting documentation. This process includes an assessment of the institution’s:

   • Financial condition

   • Historical performance with small business loans

   • Proposed SBA lending procedures and policies

4. Approval and Training: Upon approval, new SBA lenders are required to complete training on SBA loan programs, policies, and procedures. The SBA offers various training resources, including webinars and online courses, to help lenders understand their responsibilities. Source

SBA Approval Process

The SBA approval process is a multi-step journey that ensures both the lender and the borrower meet the necessary criteria for an SBA-backed loan. Here’s a breakdown of the steps involved:

1. Pre-qualification: The process begins with the lender assessing the borrower’s creditworthiness. This involves reviewing the business’s financial health, credit history, and overall eligibility based on SBA guidelines. The goal is to determine if the borrower meets the basic requirements to qualify for an SBA loan.

2. Application: Once pre-qualified, the borrower submits a detailed loan application to the lender. This application includes essential documents such as financial statements, business plans, tax returns, and personal financial information. These documents help the lender evaluate the business’s ability to repay the loan.

3. Underwriting: During the underwriting phase, the lender conducts a thorough review of the application. This involves analyzing the business’s financials, assessing the risk, and verifying that all SBA eligibility criteria are met. The lender’s credit team will make a decision based on this comprehensive evaluation.

4. SBA Guarantee: If the lender approves the loan, they will submit it to the SBA for the guarantee. The SBA reviews the loan package to ensure it complies with their standards and guidelines. Once approved, the SBA provides a guarantee, typically covering 50% to 85% of the loan amount, which significantly reduces the lender’s risk.

5. Loan Closing: After receiving the SBA guarantee, the lender proceeds with the loan closing. This involves finalizing the loan agreement, disbursing the funds to the borrower, and setting up the repayment schedule. The borrower then begins making monthly payments according to the agreed terms.

Understanding this process can help small business owners prepare adequately and increase their chances of securing an SBA loan. By knowing what to expect, they can gather the necessary documentation and meet the requirements more efficiently.

Key Components of the Agreement

The SBA Third Party Lender Agreement covers several crucial areas:

1. Loan Origination: The agreement outlines the lender’s responsibilities in originating SBA loans, including:

   • Conducting thorough credit analyses

   • Ensuring borrowers meet SBA eligibility criteria

   • Properly structuring loans according to SBA guidelines

2. Loan Servicing: Lenders are required to actively monitor and service SBA loans throughout their lifecycle. This includes:

   • Tracking payments

   • Managing collateral

   • Addressing any issues that arise during the loan term

3. Liquidation and Default Procedures: The agreement specifies the steps lenders must take in case of loan defaults and the process for liquidating collateral if necessary. Lenders must:

   • Notify the SBA of any loan default within 45 calendar days of the default date

   • Develop and implement liquidation plans when necessary

   • Obtain SBA approval before initiating certain actions, such as foreclosure proceedings on real property collateral Source

4. Reporting Requirements: Lenders must report on the status of SBA-guaranteed loans through various SBA forms and electronic reporting systems. Timely and accurate reporting is crucial for maintaining good standing with the SBA.

5. Compliance with SBA Regulations: The agreement requires lenders to adhere to SBA’s Standard Operating Procedures (SOPs) and other regulations governing SBA loan programs.

Ongoing Monitoring and Reporting Requirements by SBA Loan Servicing Office

The SBA closely monitors the performance of participating lenders to ensure compliance with regulations and maintain the integrity of its loan programs. Key aspects of this ongoing monitoring include:

1. Periodic Reviews: The SBA conducts periodic reviews of participating lenders to assess their compliance with SBA regulations and policies. These reviews may include:

   • On-site visits

   • Examination of loan files

   • Assessment of the lender’s SBA loan portfolio performance Source

2. Risk-Based Review Methodology: The SBA uses a risk-based approach to assess lender performance and compliance. Factors considered in this assessment include:

   • Loan volume

   • Default rates

   • Past compliance issues

   • Overall financial condition of the lender Source

3. Annual Lender Certification: Lenders must certify their compliance with SBA requirements annually through the Lender Certification process. This certification covers various aspects of the lender’s SBA operations and compliance with program requirements.

4. Reporting Through SBA Systems: Lenders are required to use SBA’s electronic systems for loan processing and reporting, including:

   • E-Tran for loan application submission and processing

   • Capital Access Financial System (CAFS) for ongoing loan reporting and servicing

5. Corrective Actions: If the SBA identifies issues during its monitoring process, lenders may be required to take corrective actions. In severe cases of non-compliance, the SBA may terminate a lender’s participation in SBA loan programs.

Understanding these monitoring and reporting requirements is crucial for lenders to maintain their status as SBA-approved lenders and continue offering SBA-backed loans to small businesses.

Navigating Loan Defaults and Liquidation

While the goal of every loan is successful repayment, defaults can and do occur. The SBA Third Party Lender Agreement outlines specific procedures for handling defaults and liquidation, which are crucial for both lenders and small business owners to understand. The SBA may take over litigation if it determines that a lender’s actions may adversely affect SBA’s administration of the loan program, particularly when important governmental policies or potential conflicts of interest are involved.

SBA Loan Default Prevention Strategies

Preventing defaults is in the best interest of all parties involved. Lenders and borrowers can employ several strategies to minimize the risk of default:

1. Early Communication: Lenders should maintain open lines of communication with borrowers throughout the loan term. This allows for early identification of potential issues and the opportunity to address them before they escalate.

2. Proactive Monitoring: Lenders should actively monitor loan performance and borrower financial health. This may include regular reviews of financial statements and periodic check-ins with borrowers.

3. Loan Modifications: In cases of temporary financial difficulty, lenders may consider loan modifications to help borrowers stay current. The SBA allows lenders to offer deferments or loan modifications to borrowers experiencing temporary financial difficulties. Source

4. Financial Education: Providing resources and guidance to borrowers on financial management can help them navigate challenges and maintain loan payments.

SBA’s Role in Default Situations

When a default occurs, the SBA plays a crucial role in overseeing the process and ensuring that proper procedures are followed:

1. Default Notification: Lenders must notify the SBA of any loan default within 45 calendar days of the default date. Source

2. Liquidation Plan Approval: For loans in liquidation status, lenders must develop a liquidation plan and submit it to the SBA for approval. This plan outlines the steps the lender will take to maximize recovery on the defaulted loan.

3. Guaranty Purchase: If a loan cannot be brought current or restructured, the lender may request that the SBA honor its guaranty. The SBA has a 90-day standard processing time for reviewing and processing guaranty purchase requests. Source

4. Oversight of Liquidation Process: The SBA oversees the liquidation process to ensure that lenders are taking all reasonable steps to maximize recovery and comply with SBA regulations.

SBA Liquidation Plan and Lender Responsibilities

When a loan enters liquidation status, lenders have specific responsibilities:

1. Develop Liquidation Plan: Lenders must create a comprehensive liquidation plan that outlines the steps they will take to recover the outstanding loan balance. This plan must be submitted to the SBA for approval.

2. Collateral Liquidation: If the loan is secured by collateral, lenders must take steps to liquidate the collateral in a commercially reasonable manner. This may include:

• Foreclosure on real property

• Repossession and sale of equipment

• Collection of accounts receivable

1. Litigation: In some cases, litigation may be necessary to recover loan funds. Lenders must obtain SBA approval before initiating certain types of litigation, particularly those involving significant legal fees. Lenders must treat non-SBA guaranteed loans with caution during liquidation processes to avoid conflicts of interest and ensure compliance with regulations, particularly when lenders have both SBA and non-SBA loans associated with the same borrower.

2. Ongoing Reporting: Lenders must submit semi-annual liquidation status reports to the SBA for loans in liquidation status. These reports provide updates on recovery efforts and any significant developments in the liquidation process.

3. Maximizing Recovery: Lenders are required to pursue all obligors, including guarantors, for recovery on defaulted loans. This may include seeking judgments against personal guarantors.

4. Documentation: Lenders must maintain complete and accurate loan files, including all liquidation and litigation documents, for at least six years following final disposition of the loan. Source

Understanding these default and liquidation procedures is crucial for both lenders and small business owners. For lenders, it ensures compliance with SBA requirements and maximizes the chances of recovery. For small business owners, it underscores the importance of maintaining open communication with lenders and taking proactive steps to address financial challenges before they lead to default.

SBA Guarantee and Collateral

Understanding the SBA Guarantee

The SBA guarantee is a cornerstone of SBA loans, providing a safety net for lenders and facilitating access to capital for small businesses. Essentially, the SBA guarantees a portion of the loan—typically between 50% and 85%—which means that if the borrower defaults, the SBA will reimburse the lender for the guaranteed portion. This significantly reduces the risk for lenders, encouraging them to extend credit to businesses that might not qualify for conventional loans.

The SBA guarantee comes with specific requirements that lenders must follow to ensure the integrity and effectiveness of the loan program. These requirements include:

1. Collateral Requirements: The SBA mandates that lenders secure the loan with collateral whenever possible. Collateral can include real estate, equipment, inventory, or other business assets. This provides an additional layer of security for the lender and helps mitigate the risk of loan default.

2. Loan Servicing: Lenders are responsible for servicing the loan throughout its term. This includes collecting monthly payments, monitoring the borrower’s financial health, and ensuring compliance with the loan agreement. Effective loan servicing is crucial for maintaining the loan’s performance and addressing any issues that may arise.

3. Loan Liquidation: In the event of a loan default, lenders must follow the SBA’s prescribed liquidation procedures to recover as much of the outstanding debt as possible. This involves liquidating the collateral in a commercially reasonable manner and pursuing all available avenues for recovery. The SBA provides detailed guidelines to ensure that the liquidation process is conducted fairly and efficiently.

By understanding the SBA guarantee and the associated requirements, small business owners can better navigate the SBA loan process. This knowledge helps them make informed decisions about their financing options and understand the responsibilities and protections involved in securing an SBA-backed loan.