The SBA 7(a) Loan Program authorizes the SBA to guarantee loans made by lenders to small-businesses “for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources”. Common reasons credit might not be available on reasonable terms – referred to as the Credit Elsewhere Test – include (but are not limited to) collateral shortfalls, compressed maturity dates or the lender’s policy does not allow financing to certain industries or startup businesses.
For such reasons, the SBA 7(a) Loan Program offers numerous advantages to both borrowers and lenders alike for loans approved through the program:
To the surprise of many lenders, there are thousands of American based small-business types that might qualify for financing through the SBA 7(a) Loan Program. This is primarily due to the fact that lenders with little to no SBA background typically struggle to identify eligible prospective borrowers.
Understanding the Rules and Regulations
The SBA loan life-cycle includes the followings stages: pre-approval, underwriting, processing, closing, loan sales (if applicable), servicing, and liquidation (if applicable). A lender must adhere to the SBA’s Standard Operating Procedures, commonly referred to as the SOP, throughout the entire loan life-cycle. If the SBA determines a lender was imprudent during any one of these stages, the SBA may issue a “repair” – honor only a portion of the guaranteed amount – or a “denial” – refuse to honor the guaranteed amount in full. In SBA Loan Default scenarios, the extent of the infraction may dictate the severity of the repair or denial.
There are countless scenarios when a lender’s guarantee could be jeopardy as the result of actions (or inactions) before and/or after a loan closes. However, the number one reason for repair or denial of the guarantee is failure to adhere to SBA Loan Eligibility requirements. As a frame of reference, lenders should focus on these five main areas of eligibility when attempting to pre-qualify potential borrowers:
- Industry – Ineligible: Non-profits; investment firms; businesses engaged in illegal activities
- Borrower – Eligible: U.S. based, for-profit, considered “small” and pass “Credit Elsewhere Test”
- Guarantor – Ineligible: Legal probation or previous government loan default
- Use of Proceeds – Eligible: Business acquisition, equipment, refinance, CRE or working capital
- Loan Structure – Please email firstname.lastname@example.org or call Windsor’s eligibility phone line at (312) 374-4487 for more information.
By utilizing knowledgeable SBA staff members, or in some cases engaging an experienced Lender Service Provider, a lender can ensure proper adherence to the various rules and regulations throughout the life-cycle of each loan.
The SBA 7(a) Loan Market
The below chart illustrates that a very small percentage of lenders authorize a majority of SBA volume across the market. The top 50 SBA lenders in FY2017 authorized nearly 54% of the total dollar volume across the country ($13.6 billion of $25.4 billion). However, these lenders only represented 2% of the total number of lenders that authorized at least one loan through the program during this period (1,978 total lenders).
(Source: SBA 7(a) & 504 Loan Data Reports)
While the majority of the SBA market consists of a small number of lenders, there is still an opportunity for new lenders to enter the market. A recent analysis conducted by MultiFunding found that the largest banks in the country (by asset size) are not the ones dedicating the most resources to the program based on number of branches and reach. Rather than rank the nation’s top SBA lenders by absolute number of loans originated, the study ranked each financial institution’s ratio for loan origination count to the number of locations. In addition, the gross approved dollar amount through the SBA 7(a) Program continues to increase year over year, demonstrating an increased demand from small-business borrowers across the country.
The SBA 7(a) Program offers lenders the opportunity to provide financing to small-businesses that are not able to obtain financing on reasonable terms and conditions. Depending on a lender’s defined strategic objectives, the SBA Program can increase liquidity for the lender, generate fee income in the secondary market, and/or be used as a credit enhancement. While there may be a laundry list of benefits, it is extremely important to keep in mind the many rules and regulations that must be followed to ensure the guarantee remains intact throughout the life-cycle of each loan. Ultimately, SBA 7(a) lending offers lenders a way to remain competitive in the marketplace while simultaneously providing an opportunity to assist borrowers most in need of financing.
About Windsor Advantage, LLC
Windsor Advantage provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.0 billion in government guaranteed loans and currently services a portfolio in excess of $1.1 billion (as of July 31, 2018) for over 80 lenders nationwide. With over 150 years of collective SBA experience, cutting-edge technology, rigid controls and consistent processes, Windsor Advantage is uniquely qualified to assist any sized lender with implementing a thoughtful and profitable government guaranteed lending initiative.
Windsor Advantage has a team of 28 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; and Charleston, South Carolina. For more information, please contact Andrew Sheaffer at (312) 248-8530.
About the Author: Matt Weglarz manages Windsor’s Processing department. Matt has closed more than 100 SBA and USDA loans for over $125 million. He graduated from the University of Illinois with a dual degree in Finance and Accounting. Previously, Matt worked at Consolidated Trading LLC as an options trader. He is responsible for all processing functions and can be reached at (312) 248-8529.