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Welcome to the SBAadvisors Blog!

Dec.
01 st

The Top 5 Requirements to Starting or Expanding an SBA Lending Platform: #4 PROCESS

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Best Practices in SBA Lending 

Compliance and the SBA Guaranty

The fourth “P” is Process

At the beginning of this blog series, we discussed the foundation of an SBA lending platform: the SBA Credit Policy (aka: the PLAN).  Just as important to your success is to write an SBA Loan Policy and Procedures Manual establishing the PROCESS.

Why establish the PROCESS?

There is a history of lenders who make a few SBA loans with little to no experience.  Too often one of these loans go bad and the lender discovers that the SBA will not honor the guaranty because of a failure in SBA compliance.  There are other lenders who make a significant number of SBA loans. When one loan goes bad, there tends to be sleepless nights wondering if the SBA will find a reason to not honor the guaranty. As long as you are lending, you will have loans that default.

However, you do not need to worry or have sleepless nights.   The facts are that the loans not honored by the SBA due to a compliance issue represent only .05%.  This shows that the vast majority of SBA lenders focus on compliance throughout the life of the loan and they apply compliance on a very consistent basis.  You can too!

Compliance Requirements

It is important to know that the SBA loan has significant compliance requirements throughout the entire loan process.  Ensuring the request is eligible may be the most simple of all the compliance requirements.  Other additional compliance requirements are in the processing, closing, funding and servicing of the loan.

Identifying these requirements and making policy and procedures to ensure compliance throughout the process should be documented in an SBA Loan Policy and Procedures Manual.  The SBA SOP 50-10-6 covers these processes and requirements in great detail. However, it is vital for your SBA team to have these processes outlined. This mitigates no balls are dropped through the cracks and that every loan follows the exact same process.

By establishing your process with compliance built in, the lender can develop a premier fast and efficient loan process.  I am asked often by SBA lenders how they can attract more loan applicants.

The lenders who have a streamlined process that delivers timely results for the applicant can build a strong reputation in the marketplace.  When the focus is “results for the customer”, word spreads quickly where to go for an SBA loan.

A thoughtful and practically written Policy and Procedures can ensure this and give the bank a very competitive edge.

(For more on writing an SBA Policy and Procedures Manual, please contact Tim Terry at 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!

Sep.
29 th

The Top 5 Requirements to Starting or Expanding an SBA Lending Platform: #1 PURPOSE

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With over 30 years of experience in setting up SBA lending departments, Tim Terry, CEO of SBA Advisors, has compiled “The Top 5 Requirements to Starting or Expanding an SBA Lending Platform”.  This will be a blog series and today we kick it off with the first requirement…

 

Knowing your PURPOSE for SBA Lending

 

Why can SBA lending be the most successful and profitable program offered by your lending institution? Why do some SBA lending institutions grow rapidly and others never seem to achieve their potential? When the economy slows down, why does SBA lending increase?

This blog series will focus on answering these questions and more. While the SBA loan program has literally doubled in size in the past 5 years, the SBA industry experts expect it can double again in the next 5 years. Every commercial lender should be considering the strategic utilization of the SBA 7(a), SBA 504 and the USDA B&I programs for significant loan growth and fee income.

This series will focus on 5 P’s for the successful launch or expansion of SBA lending. These 5 P’s will provide the basis / outline for your SBA lending PLAN which is critical in gaining acceptance by your senior management (especially your CCO) and the board of directors.

The first is “Purpose”. Let’s start by discussing why your lending institution should be doing SBA lending?

Strategic reasons include but are not limited to the following:

  1. Saying “yes” to more customers. These government credit enhancement programs provide for a much longer amortization than commercial loans. Longer term simply means no balloon payments and improvement in debt service coverage. As a slowdown in the economy occurs, reduced cash flow impacts most businesses. What might have been a traditional conventional loan last year, now becomes an SBA opportunity, simply due to longer amortization.
  2. Improving customer’s cash flow is also a very vital reason for SBA lending. One simple example would be using a longer amortization for refinancing loans with shorter terms and higher interest rates.
  3. Inadequate collateral will kill a new deal. SBA loans are based more on cash flow / debt service coverage than collateral. How does a lender do a commercial loan for a retail store in a leased location with virtually no collateral? If the customer meets the other “Cs” of credit, the SBA guaranty, typically 75% (but can go as high as 90%,) addresses the lack of adequate collateral. In fact, I think we all would prefer to have a guaranty from uncle Sam than having “dad sign the loan.”
  4. Improving your CRA is becoming critical for those lending institutions seeking to add locations or buy other lending institutions. There is no faster way to do this than by establishing a strategic plan and implementation of an SBA lending platform.
  5. Selling the SBA guaranty portion of the loan helps the lender generate fee income. The secondary market for SBA loans is vibrant. When demand for very secure investments rises, so does the secondary market. The SBA industry has averaged better than 110% on the sale of the guaranteed portion of the loan. Add another 1% on-going servicing fee and you can begin to understand the profitability impact of SBA lending. (see note 1 below).
  6. Historical statistics show that implementation of marketing an SBA program leads to an average increase in commercial loans of 15%.
  7. Loan growth, especially in a highly competitive environment requires great “brand identification.” Marketing SBA lending provides a huge attraction to new business. How many lenders do you know that actively promote a strong commitment to small business? And the lack of this marketing effort allows for national SBA lenders to come into your market and steal existing and new customers. These national lenders with no locations even in the same state, spend a lot on marketing. To compete, your lending institution needs a strategic marketing plan specifically to attract quality loan customers. When a potential loan customer starts thinking about where to get a loan, you want your “Brand” to be first on everyone’s mind.

While all these reasons give cause for great consideration to SBA lending and form your “purpose”, these are the positives. In the next blog, we will discuss the government and loan compliance aspects of SBA lending. This can be a daunting challenge unless you have your plan in place to address it.

 

Note 1: For a financial comparison of the profitability of an SBA 7(a) loan, sell vs hold, please contact the author at Tim@SBAadvisors.com

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