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