SBA Lending can be an effective tool in providing small business with better access to capital and lenders are signing up to provide these programs at record levels. This is evident by the number of banks, credit unions, Certified Development Companies, and Community Development Financial Institutions that are adding SBA products to their offering. The National Association of Government Guaranteed Lenders hosts several SBA conferences each year and the last few years, these conferences have been sold out.
The secondary market for investors looking for a relatively safe investment is still very robust. Lenders can sell the guaranteed portion of the loan for premiums that have been as high as 19%. This is not the reason you should entertain this specialized lending because this can change as it did in 2008. If you as a lender are interested in providing small business with better access to capital with some of the risk mitigated, this is a program you should consider and the time could not be better.
There are however, barriers to entry that make this jump a little uneasy for new lenders to enter this type specialized lending. The shortage of specialized SBA staff, ever changing SBA Standard Operating Procedures and the fear of losing the guaranty cause some lenders to reconsider.
In 2008, approximately 25% of the specialized staff required for SBA lending left the industry. It was not until 2012 did the levels comeback but in the meantime, SBA lending has reached record levels, causing many lenders to have to pay more for SBA specialists than what they did just a few years before. We see in any one market that 75% of the SBA lenders “dabble” in SBA lending meaning approving 1-6 loans per year. This is not a sustainable course because it does require specialized staff in processing, closing and servicing SBA loans.
There are alternatives whereas lenders focus resources on business development and outsource the processing, closing and servicing functions. There are approximately 6-10 “national lender service providers” such as Windsor Advantage in the market along with many “mom & pop” providers servicing one or two lenders locally. This is virtually an unregulated part of the industry that is getting more and more attention as Congress pushes the SBA to be better stewards of the program. Those of us who have been in the industry and want to make sure this program is “done right” welcome the additional scrutiny, although hopefully not as cumbersome and restrictive as Dodd Frank requirements. Vendor management is becoming more and more of a focus for all of us. The issues of adding staff or Conference.
One of the next important issues that we have as bankers is how to manage the risk of SBA lending. Historically most lenders focus on all five “c’s” of credit yet when an SBA project is presented, it is almost always going to be an undercollateralized project with good cash flow or based upon projections. Almost all SBA lenders want real estate as collateral but there are other opportunities such as business acquisition that can prove to be “good” SBA projects. You must consider the level of goodwill you and your team are comfortable with and once that is decided, there are several financing opportunities available. We will review some of the merits of this type of financing again at the IBE The One Conference.
We will discuss the following three key elements in starting and maintaining a successful SBA program:
- The SBA Plan
- The SBA People
- The SBA Process
If you look at the monthly data provided to us by the SBA it shows approvals year to date from each lender in each market. You can see different types of strategies. You have the lender that uses the program as “the loan of last resort” and used the guaranty when a current borrower needs financing, you like the client and just don’t have enough collateral. This is the safest path and what the program is designed for. Credit elsewhere tests are becoming a focus in the SBA risked based reviews today.
If you enjoy a robust C&I lending team or even a branch network that has some experience in small business lending, you can grow your SBA portfolio organically. We encourage lenders to first develop an efficient process (or your loan officers will not buy into SBA lending), set some realistic goals and even provide some incentives and again a very good path to have a successful SBA program.
Lastly there is the path of utilizing business brokers, loan brokers and other referral sources This comes with its risk and reward. You always need to know your borrower, do not depend 100% on the financial information provided to you by the referral source and take over the process once the loan has been referred to your shop. Referral fees are commonly paid, but there is the “two master” rule which does not permit referral sources from charging the borrower and the lender for the same service. This again will be discussed at the IBA The One conference.
It is a good time to look at SBA lending for your institution. There are sufficient support organizations that you can work with to stay out of hot water and develop the internal and external controls to insure the program is successful You can also develop a consistent delivery system to insure both internal buy in from your loan officers and external buy in from your accountants, business brokers and realtors who’s only objective is to get to the closing table.