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How Much Does It Cost to Get Started and When Should We Expect to Break Even?

With any new business plan, we want to know all about the investment needed and the timeline to profitability. As a Commercial/SBA Lender, you need this knowledge to determine the credit strength in any new deal. When a bank is considering investing in a new SBA lending platform, it is just as vital to fully understand the costs associated, the variables involved and the timeline to profitability. Recently, one of my new clients told me that they had already completed the “budget” for a new SBA lending initiative at the bank. Like many created “budgets”, it was a quick view of what was to be expected. Adequate for exploratory purposes, but not when you decide to commit to an SBA lending platform.

I was asked by this client to complete a 3 year SBA departmental budget. When completed and compared to the budget created by the bank, they could not have been more different. I completed two models for 3 years each. The first showed results based on holding all the loans. The second model showed results based on selling the SBA guaranty portion on the secondary market. You can probably guess which one made money in the first year and which one did not show a profit until late into the second year.

There are so many variables that need to be considered in an SBA budget:

Forecasting how many loans to be approved and funded in each of the 3 years.
What average loan size to anticipate?
What average pricing on the loans should be targeted?
How many days or weeks from initial approval to a closed and funded loan?
What incentive should be paid to commercial lenders for doing an SBA loan?
Should we pay broker fees and how much?
If we sell the SBA guaranty, what average pricing should be expected?
Should you charge a packaging or processing fee and if so, how much?
Should we totally staff the department or utilize a Loan Service Provider (LSP) until loan production proves full time staff are necessary?
Who and what skill sets are needed first as you get started and how much will they cost?
What percentage of total loan production should be calculated for Loan Loss Reserve?
What should be spent on marketing?
Should we just use internal commercial lenders or hire dedicated SBA lenders?
What incentives and how much should be considered for SBA BDOs?
What other “best practices” should be accounted for including software, training, etc.?

And there are many other questions or variables that need to be taken into consideration. But when the budgets are completed, management can have a very clear understanding of the costs involved and when and what and how much money can be made in each of the first 3 years.

Solid information for making sound decisions about starting and growing an SBA department makes a huge difference in those new SBA lenders who succeed in a big way and those that don’t come close to meeting expectations.

(For more information and assistance in developing an SBA department budget, please contact Tim@SBAadvisors.com)

“The Top 5 Requirements to Starting or Expanding an SBA Lending Platform” written by Tim Terry, CEO of SBA Advisors.

Welcome to the SBAadvisors Blog!

Oct.

20^th

The Top 5 Requirements to Starting or Expanding an SBA Lending Platform: #2 PLAN, part b

By Tim Terry |

Why Have A Stand-Alone SBA Credit Policy

From the last blog, we discussed having a Plan for SBA lending starting with a stand-alone SBA credit policy. Let’s continue the discussion on the mandate for an SBA Credit Policy.

First and foremost, it is important to understand that the SBA credit policy forms the foundation for your SBA lending program.

SBA requires it.

Regulators will want to see it.

It tells the BDO what types of deals and industries you are willing to consider and possibly those type of loans that you know you will never consider.

It says where (geographically) you want to lend. This is very important in maintaining and improving your CRA.

It will outline collateral requirements along with maximum loan amortizations and maximum pricing.

Let’s not forget the importance of establishing SBA loan minimum debt coverages and how that is to be calculated.

And you simply cannot meet the SBA compliance requirements if you do not cover the critical aspects of SBA credit that could cause the loan’s government guarantee to be jeopardized. In fact, the SBA Credit Policy when implemented will ensure SBA compliance.

A good Business Development Officer (BDO) will want to review your credit policy to ensure he can be successful with the type and pricing of generated loan requests. A well written credit policy will actually help in your recruiting efforts.

But having an SBA Credit Policy will not help you establish and grow an SBA lending platform IF your Chief Credit Officer has not approved and shown support for SBA lending. Without the CCO support and encouragement, you will be wasting your time attempting SBA lending.

“The Top 5 Requirements to Starting or Expanding an SBA Lending Platform” written by Tim Terry, CEO of SBA Advisors.

For more on creating an SBA Credit Policy, please contact this author at Tim@SBAadvisors.com

Welcome to the SBAadvisors Blog!

Oct.

15^th

The Top 5 Requirements to Starting or Expanding an SBA Lending Platform: #2 PLAN, part a

By Tim Terry |

In part two of this series on “The Top 5 Requirements to Starting or Expanding an SBA lending Platform”, we address the requirement of having a PLAN.

When would you ever make a loan to a new company without seeing their business plan? And, why would you expect your board and managerial team to agree to implement SBA lending without a defined plan?

You have heard about lenders who hire a Business Development Officer who purports to know SBA lending to start an SBA lending platform. Then a year later, the lender is shutting down SBA lending, liquidating the SBA loans that have gone bad and regretting ever doing SBA lending. This is a classic scenario.

You have also seen lenders who start SBA lending and it becomes a game changer.

What did the successful lender do that the other did not? I have spent almost 30 years and over 28 lending institutions, establishing successful SBA lending platforms. Many of these lenders contacted me to help them get started by finding a successful BDO they can hire. Yet history suggests that you should not just start with hiring a BDO. What does your plan say you should do first?

Several years ago, I was asked by a $28 Billion lending institution to help them start SBA lending. They asked that I hire at least 5 SBA proven loan producers. Sounds easy until you understand what the successful BDO needs in order to continue their lending success. So, I asked the CCO, who will be making the credit decisions? The answer was classic. Apparently commercial credit was their expertise and the current credit team would have no problem in handling SBA loan requests.

BUT, and it is a huge “but”, the proven loan producer wants a credit officer who knows SBA lending. They want someone who has reviewed over a thousand SBA loan requests. Without this experience, a credit officer will not be happy making a lot of “exception to policy loans.” And you don’t want a BDO telling the bank that they should approve every loan request because it is SBA eligible. Eligibility and credit quality are two separate criteria.

The BDO says, I don’t want to be the one who has all the SBA expertise. I need a loan officer who has more expertise than me. Someone who knows how to structure a loan to meet SBA compliance requirements.

I told this $28 Billion lending institution, that I would not and even could not hire proven loan producers without them agreeing to a written SBA credit policy AND hiring an experienced SBA credit manager. The credit policy tells the BDO the kinds of deals you like and don’t like. It gives them all the parameters necessary to get a loan approved. It tells the BDO if their historical and current pipeline of deals, are the type deals that can gain credit approval. This successful BDO does not want to have to reinvent themselves. They don’t want to have to develop an entirely new group of COI’s and brokers.

So who do you think they hired first? And three years later, this lending institution has a very successful national SBA lending program having hired very successful proven loan producers.

In Part One of this series, we discussed the “why” or “purpose” for doing SBA lending at your institution. In Part Two, the discussion is about the “WHAT” of SBA lending. The “what” should be written as part of your PLAN. It should cover the following:

SBA Credit Policy – When making an SBA loan, you are saying that the loan request does not meet your conventional commercial credit policy. In fact, an SBA loan is an “exception” to current policy. Hence the need to establish a written credit policy that explains the parameters for doing these exception loans.

Every SBA lending institution needs an SBA lending Credit Policy. It should contain many of the same criteria that your conventional policy contains, like lending territory, collateral and debt coverage requirements and the other “C’s” of credit.

But most important should be SBA compliance requirements!

The fact is that the SBA will guaranty a very large portion of the loan IF you agree to comply with specific requirements outlined in the SBA Standard Operating Policy manual called the SOP 50-10-6. If you do, you are “protecting the US taxpayer, who pays for the program through their tax dollars. If you don’t demonstrate this, then the SBA may say that you don’t deserve the guaranty and may want to modify or even reject the guaranty”. This sounds harsh. It actually does not happen very often. But the idea that it could happen, should be sufficient to motivate you to know the SOP and put SBA credit compliance in a written format for your entire institution.

Number 2 and following is covered in the next few blogs… Stay tuned!

“The Top 5 Requirements to Starting or Expanding an SBA Lending Platform” written by Tim Terry, CEO of SBA Advisors.

To receive an SBA credit policy table of contents, please contact this author at Tim@SBAadvisors.com

Welcome to the SBAadvisors Blog!

Jul.

23^rd

The Evolution of SBA Loan Service Providers

By Tim Terry | 6 Comments

Back in the early 90’s, I was teaching bankers how to do SBA lending. I also helped in doing credit analysis and loan packaging. Everyone called me a loan packager. As my business has evolved into setting up SBA departments and finding people to fill SBA jobs, so has the cottage industry that seeks to support small SBA lending programs.

Today we call this industry that of the SBA Loan Service Providers or LSP. They come in all skill sets. Some just do SBA loan packaging. Others focus on SBA credit analysis, etc. There are a few that are what we might call “full service”, proclaiming that they have the expertise to be your entire SBA back office. While it would serve the SBA lending community for the SBA to classify LSPs as “certified” according to their skills and abilities, it will be incumbent upon you to check them out. Significant due diligence is required. Many will say they are full service. However, there are just a few nationwide that this author would recognize and agree as having the full service skill sets required to fully protect the SBA guaranty.

The SBA has set up a policy in the SOP 50-105 (f) that regulates the fees that the LSPs can charge and there are caps. But, LSPs have been very creative as to how to get around this SOP policy and charge for “add on services”. Any LSP agreement must be sent to the SBA for approval by the bank and not the LSP.

Why has there been a rise in the number of and use of LSPs nationwide? The simple answers are, 1) the cost of hiring experienced SBA lending staff that know their job well enough to meet SBA compliance and protect the SBA guaranty, and 2) the lack of available SBA lending talent.

When the recession hit in October of 2008, I started receiving hundreds of resumes of SBA lenders who had lost their jobs. This continued throughout 2009. Many of these people had no choice but to move on to other careers, most often outside of banking. Significant hiring did not occur again until the second half of 2011. During the good lending years, the SBA industry has been good about bringing in new and younger people and training them. But during this recession, the industry simply did not replenish the pool. So, not only did we lose good people, but we did not replenish.

Once hiring began again, all lenders were focused on new loan growth. If the hiring manager were able to add to their team, it would have to be a seasoned professional who could “hit the ground running!” Some of the people who lost their jobs were able to come back into the industry. But, demand has outpaced supply and we have seen a major increase in compensation for these seasoned professionals. Starting an SBA department today, with a comprehensive backroom capable of doing in excess of $20 million in loan production, will cost the bank in excess of $600,000 start up first year including software, etc.

With the significant rise in secondary market premiums, along with flush banks that need loan growth, the SBA lending program has gained significant popularity unseen since the mid 90’s. Increases in SBA compliance have also risen to greater degree. The fear of losing the SBA guaranty is real. The mandate from the SBA is to do it right or do not do it at all.

How does a bank that wants to start an SBA program get started without the high cost of staffing, software and insuring compliance? Enter the rise of Loan Service Providers.

In the next part of this series I will discuss the people behind the LSPs. Who are they? Where did they come from and gain their SBA expertise? How do you complete due diligence on these support companies? And, most importantly, what are the pros and cons of using LSPs?