To illustrate the top reasons to outsource your SBA department, let’s start with 3 situations to avoid:
Scenario 1 – Economic Risk: You’ve already made a significant investment in the people and systems necessary to offer SBA loans. Costs were higher than originally expected and additional expenses continue to build. You’re seeing some volume, but not enough to justify the large back office expense. You want to continue to offer 7(a) loans to qualified borrowers in your community. The SBA loans are good business, but there is just not enough to justify the cost of maintaining an experienced SBA department.
Scenario 2 – Scalability Issue: You’ve had initial success with your SBA 7(a) program. Qualified prospects are calling you looking for SBA loans. Referral sources and centers of influence know you’re in the SBA business. But pretty soon, your team/specialist is overwhelmed and customer service is starting to suffer. You’re unable to respond quickly and thoughtfully to the prospects and referral sources. Technical servicing items are popping up within the portfolio that require attention. Not only are you unable to properly service the prospects, you worry your reputation in the community may suffer.
Scenario 3 – Continuity Concern: You’ve been in the SBA market for some time. Your executive team manages the overall SBA strategy, but you have a specialized team (or individual) to ensure you do it right and stay in compliance with all of the SBA’s rules and regulations. Just when everything is going really well, your department manager, key closing specialist or SBA servicer leaves. Or worse, the entire team leaves. You have a pipeline of opportunities and prospects and a portfolio of SBA borrowers, but no resources to manage the tactical needs of the business. Lack of continuity has put your bank and balance sheet at risk.
The Lender Service Provider Solution
Each of these situations can be a very real problem when you’re involved in specialty lending, and in particular, SBA 7(a) lending.
Fortunately, organizations referred to as Lender Service Providers (LSPs) exist to provide solutions to mitigate these risks. Outsourcing your SBA back office to a “turnkey” LSP can solve for these risks and more.
The benefits of outsourcing can be summarized in three general categories:
- Economics – Immediate profitability at a variable cost
- Scalability – Experienced staff at any volume
- Continuity – Proven processes and continuity at both the position level and overall department level
Benefit 1 – Immediate SBA Department Profitability at a Variable Cost
The first benefit, and easiest to quantify, is immediate profitability. Minimum staffing for an SBA department includes a packager, closer, and servicer. Add in the cost of a department manager and the additional overhead and compliance costs, and the fixed costs easily exceed $500,000 per year. Considering these costs, it is not possible to run a properly-staffed and experienced SBA department at a profit if you are funding less than $15 million of SBA loans per year. This breakeven point is increased if the lender does not sell the guaranteed portion and keeps the full loan on the balance sheet.
The below chart illustrates that very few lenders actually achieve this level of volume. Of the 2,045 lenders that authorized an SBA 7(a) loan in fiscal 2016, less than 250 lenders funded more than $15 million:
Our SBA Market Outlook issued in February of 2016 explores the increased concentration of SBA loan volume through fewer lenders.
An LSP eliminates the risk of fixed costs and results in an immediately profitable SBA department.
Benefit 2 – Lender Service Providers Offer Scalability with Experience
In the current market, it is difficult to hire and retain talented employees with the necessary SBA-specific experience. In addition to finding the right packagers, closers and servicers, a strong department manager needs to be in place to coordinate the functions and meet the strategic plan. This can include everything from working with Lenders to pre-qualify new leads to ensuring the credit team is always up to date on the latest rules and regulations. Without experience in both the subject matter and the process, you are taking risks with your guarantee. The SBA has specific SOPs that must be followed to ensure your loan is eligible and that your guarantee is honored.
An experienced LSP provides all of these functions as well as the strategy and process guidance necessary to provide an immediate, impactful solution.
Benefit 3 – Outsourcing your SBA and USDA Department Provides Continuity and Proven Processes
Employees leave. Staff get sick. Entire teams “lift out” and head to another company for any number of reasons, and your bank is left with the risk. These can include but are not limited to:
- Reputation and execution risk for loans currently in the pipeline.
- Economic risk with the costs incurred for systems, support, compliance and others.
- Compliance risk (which ultimately becomes an economic risk if the guarantee is impacted) for servicing and liquidation of the existing portfolio.
You must have proper controls in place to mitigate the residual risk.
Outsourcing to an LSP eliminates the continuity concern and ultimately mitigates much of the reputational, economic and compliance residual risk through proven and consistent processes. Additionally, an experienced LSP ensures that these services are continuously updated based on best practices to provide the most efficient process possible.
Is a Lender Service Provider the Right Option for You?
If you decide to move forward with a LSP relationship, the SBA requires that you enter into a “lender service provider agreement” (LSPA) and that the LSPA be submitted to, and accepted by, the SBA. The SBA requires that the LSPA must be cancelable with a short notice period. This allows the lender to receive the benefits of the LSP relationship (immediate profitability, variable cost, scalability, experience and continuity), but gives the lender the option to bring the services “in-house” at any time and with no termination fee.
Additionally, a well-structured LSP relationship should include no minimum volume, no minimum loan size, ongoing training, and no fixed fees, even for training. These benefits provide banks with the opportunity to create an efficient and effective SBA initiative without any of the quantitative or qualitative risks associated with implementation and scaling-up.
If you’ve made the decision to outsource your SBA department, remember to perform comprehensive due diligence on the LSP.
Our next blog will provide you with the specifics of how to conduct the diligence necessary to ensure your LSP is qualified and a cultural fit for your company.
About Windsor Advantage, LLC
Windsor Advantage is a Lender Service Provider that provides a comprehensive outsourced SBA and USDA loan department to lenders nationwide. Services are provided on a variable cost basis with no minimum volume requirement. Windsor also provides continuing training and technical assistance to lenders at no cost. Since 2010, Windsor has processed more than $1.4 billion in government guaranteed loans and currently services a portfolio of more than $1.1 billion in loans for more than 70 banks across the US. Windsor Advantage is based in Chicago, Illinois, with offices in Indianapolis, Los Angeles and Charleston, SC. For more information visit WindsorAdvantage.com.
About the Author: Shawn is the Managing Director of Windsor Advantage. He has nearly 20 years of financial services experience. Prior to founding Windsor in 2010, Shawn was Managing Director and equity partner of a $600 million debt fund with a focus on SBA lending and asset-based lending. While at the fund, he led the acquisition of one of the 14 SBA Small Business Lending Company (SBLC) licenses.