SBA Lending – What’s In It For Me?
We all know the benefits an SBA loan can have for a borrower – access to start-up or expansion capital, acquisition of another business, refinance of existing debt or even working capital on a term or revolving basis.
But what’s in it for the bank? Ultimately, you’ll have the opportunity to generate similar or higher profit on a SBA loan compared to a conventional transaction but with less risk. The loan will have longer terms and potentially a higher interest rate. You and your customer win.
There are five primary compelling reasons for lenders to use the SBA loan programs.
1. Risk Mitigation
Becoming a “small business friendly” bank carries a certain amount of risk. The SBA programs don’t eliminate the hard work of underwriting or loan due diligence, but the risk of loaning to a small business is controllable.
The biggest advantage is the availability of a 50%-90% loan guaranty depending on the program and loan amount. In general, the 7(a) program provides a 75% guaranty for loans greater than $150,000. Loans up to $150,000 carry an 85% guaranty. SBA Express, a streamlined (and simplified) program for revolving lines of credit and term loans provides a 50% guaranty.
The SBA Guaranty does provide a lender confidence to provide otherwise unavailable financing to a credit worthy borrower in a responsible manner. A guaranty further reduces risks with many small business loans – unproven earnings, limited equity, inadequate collateral, industry rate or extended maturities.
What’s in it for your bank? You have reduced portfolio risk versus tighter lending standards under your conventional policies, growth of your loan portfolio and increased customer satisfaction and retention.
2. Business Development and Retention
Most loan officers unfamiliar with SBA never consider the program as a competitive advantage and a vehicle for customer development or even retaining current customers. Closely related to mitigating risk, the SBA guaranty enables lenders to provide financing outside of parameters for conventional loan products.
Many existing small businesses meet cash flow and credit parameters defined by a bank’s lending policies but may have collateral shortfalls. For example, many service related businesses simply are not capital intensive. The guaranty provides a means to overcome certain credit shortfalls and still meet the needs of otherwise worthy customers.
SBA Express is a great tool for assisting the small business start-up or grow. Once you receive authority to participate, loans are on your paper and can be processed quickly. The Express loan can begin as a line of credit when the borrower doesn’t require the proceeds to be disbursed all at once, then termed out when fully drawn providing a small business the flexibility they need, especially in their early stages. Small business owners appreciate the flexibility and you solidify your position as a valued partner.
SBA CapLines are not widely used products and have the same guaranty provisions as the 7(a) program. They are designed to meet small business needs to finance seasonal and/or short-term working capital, construction costs, advances against existing inventory and receivables or consolidation of short-term debts. They have a revolving feature and a 10-year term (except the Builder’s CapLine).
What’s in it for your bank? Properly executed as a part of your lending strategies, you no longer have to lose quality customers to competition. In addition to SBA interest income and potential premium income from the secondary market, cross selling opportunities like business deposits and checking, employee accounts, cash management services, merchant services, lines of credit are gained or preserved.
3. Balance Sheet Considerations
Income Statement considerations are obvious producing interest income for the bank. What is sometimes overlooked are the Balance Sheet ramifications and the advantages to the bank.
One of the most profitable features of SBA lending is Secondary Market availability. Current premiums for the sale of the guaranteed portion of loans sold currently range from 109-114 resulting in premium (non-interest) and servicing fee income as a result of the transactions.
In addition, the bank achieves optimal capital retention since your loan loss reserve is based only on the non-guaranteed portion of the loan remaining on your books.
What’s in it for your bank? You’re able to manage and retain liquidity to be able to re-lend and grow faster and profitably.
4. Overcoming Lender Policy Limitations
Many times, a bank’s lending policies my limit or prohibit lending to certain industries, startup businesses, companies that don’t meet the required higher debt coverage ratio or even a business acquisition with “goodwill”. The enhancement of the SBA Guaranty may allow a lender to overcome such loan policy hurdles and finance an otherwise qualified borrower.
What’s in it for your bank? The guaranty may allow you to overcome specific loan policy impediments and retain customers you might otherwise lose.
5. Regulatory Compliance
You might be surprised that a government regulated program like SBA, especially 7(a), can assist a bank with the myriad of today’s regulatory compliance programs. Because only the unguaranteed portion of SBA loans count toward legal limits, your bank can comply with lending limit restrictions while meeting customer needs.
Only the unguaranteed portion of SBA loans are considered in “risk based asset” calculations so there is a reduction of capital requirements necessary to make the loan. The guaranteed portion doesn’t affect Tier 1 calculations.
SBA loans are often viewed as evidence of community commitment to meet provisions of the Community Reinvestment Act. You might note that CRA needs alone are not sufficient for SBA’s credit elsewhere test.
What’s in it for your bank? Every bank is different when it comes to regulatory issues, but SBA can be a bonus. You can grow your loan portfolio faster by using SBA since the guaranteed portion of the loans are not considered as risk based assets.
While an SBA Guaranty will never make a bad loan good, it does make a good loan stronger. To create a successful SBA loan program takes commitment and resources. As lender service provider, we can help navigate the requirements and avoid the costs of creating a “department”. It’s really very simple. Call us to discover how.
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