Lenders have discovered the benefits of the SBA 7(a) Loan Program and are making loans at a record pace. As the below chart illustrates, total dollar volume hit a three-year high of $25.45 billion in FY 2017 (as of September 30, 2017). At the same time, the number of lender participants has dropped to 1,978 — the lowest level in ten years:
To be successful in this increasingly competitive space, a lender needs to thoughtfully define and methodically execute its SBA strategy. To define its SBA strategy, a lender should start by answering these five questions:
- Why do you want to be an SBA lender?
- What kind of loans will you make?
- Where will you lend?
- How are you going to originate loans?
- How are you going to pay?
As we’ll discuss below, there are many answers to each of these questions. While no one answer is correct, some answers are more likely to result in a successful SBA initiative. The response to each question impacts the other strategic components and will form the overall culture and success of your SBA department. The answers, and ultimately the strategy, must be documented and followed. Strategy is a living concept that should drive every decision and be used to measure success. Communication of the strategy, and consistent implementation of the criteria, is critical to long term success.
The answers to these questions must be expanded and ultimately incorporated into the policies, procedures, templates and culture of your department.
1. Why Participate in the Program
What is the organization’s goal for utilizing the SBA 7(a) Program? The most common answers are:
- Credit Enhancement – Provide credit to borrowers, guarantors or industries that would otherwise not qualify for a loan under your conventional loan guidelines
- Liquidity & Fee Income – Generate fee income and liquidity from the sale of the guaranteed portion of loans
2. What Types of Loans
What kind of loans will you make through the 7(a) Program? Considerations include:
- Industry – Many lenders will only make loans into certain industries such as single purpose CRE and service businesses with a 7(a) guarantee. Will you focus on an industry niche or be a generalist?
- Use of proceeds – Will you finance change of ownership, ground up construction or working capital through the 7(a) Program?
- Size – SBA loans can be up to $5,000,000. Will you have a minimum or maximum loan size?
3. Where Will You Lend
Will you lend within a geographic footprint or will you use the program to expand your reach? Defining your footprint is critical as referral sources and in-bound opportunities take time to review. Geographic boundaries must be defined up front.
4. How Will You Originate Loans
Will you use outside origination sources or will you use your existing lender and branch network? Additionally, what technologies will you use to facilitate your origination effort? Depending on the size and velocity of loans you expect, it may be necessary to implement a technology solution for the origination or underwriting process.
5. How Will You Pay for Originations
How will you compensate lenders and referral sources for SBA loan volume? Before rolling out the program, the lender must define the compensation structure for originations. If the “what” and “where” components have been defined and messaged to your origination team, the only question left is compensation. Keep it simple and, most importantly, be consistent.
Setting an SBA strategy is all about documenting your vision and communicating that vision to your stakeholders. Clarifying your strategy will allow you to make consistent credit decisions and build a team with the right people. This is the fun part. If you get the strategy right, and if you execute on that strategy every day with the right people, success will follow.
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 $1.5 billion in government guaranteed loans and currently services a portfolio in excess of $1.2 billion in loans for more than 70 banks across the US. Windsor Advantage is based in Chicago, IL, with offices in Indianapolis, IN, Los Angeles, CA, and Charleston, SC. For more information please call (312) 248-8530.
About the Author: Shawn is the Managing Director of Windsor Advantage. He has 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 and USDA 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.