Tip of the Week
The Three "P's" of successful SBA Lending
You've heard about the 5 C's of credit (Character, Capacity, Capital, Collateral, and Conditions). But have you heard of the 3 P's of SBA Lending? More on that later but for those who can't wait, we think there are three key words that start with the letter P that apply to successful SBA lending:
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Prudent
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Productive
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Profitable
But first, let's clarify what we mean by SBA Lending and an SBA Loan. When you think about it, we all use that term "SBA Loan" frequently but do we really think about what it means? We need to differentiate between the two main SBA Loan Programs, SBA 7(a), the bank loan guarantee program (a "wrapper" for a lender originated and funded loan); and the SBA 504 economic development program, a subordinated mortgage program where the private sector lender's loan is in first mortgage position and the government enhanced (guaranteed loan) is in second position.
So in the case of 7(a), the SBA loan really is a conventional loan wrapped with additional qualifying requirements and benefits of a credit enhancement in the form of a government guaranty. That guaranty flows to the bank if and when it is needed (provided all the parties to the loan met the requirements correctly).
The SBA 504 "loan" is essentially a program or structure that supports more flexible lending by conventional lenders due to the attractive loan to value, long terms etc provided by the program. In fact, there are at least two (and sometimes more) loans to the SBA 504 Loan Program.
So now that we are all on the same page about what an SBA Loan really is, think about the processes involved in the various types of loans that lenders offer. It is no wonder that many lenders struggle with developing effective policies and procedures and executing efficient work flow.
Starting with the most simplistic loan, a consumer loan - the process is geared around verification of employment and other income as well as personal obligations that must be paid. Ultimately the focus is on net cash flow to pay the debt. In most cases, use of funds is less of a concern provided that source of repayment is solid. Without oversimplifying this type of loan process, let's agree that this is generally more of a "cookie cutter" process where simplicity and consistency are generally rewarded on a portfolio basis.
Business lending, at its roots, builds on the principals of effective consumer lending because small businesses typically have owners/sponsors who are closely tied to the success (and failure) of the business. Therefore, understanding and underwriting the consumer behind the deal is important. Additionally, the lender needs a process to gather information about the business, evaluate or analyze that information and then report (document through a credit memo) the decision process (pros and cons) of the deal. Sources and uses of funds including equity stake hold, type and amount of collateral on a realistic basis is essential, and a good understanding of management capacity, are all for starters, differentiators with the consumer process. In short, business lending combines the best consumer and commercial underwriting practices so that prudent lenders can make sound credit decisions.
And then we bring SBA lending into the mix. Some lenders leverage SBA as an afterthought, or even as a last resort, after they have exhausted their conventional lending options. Others think SBA from the "get go", offering options to the bank and the customer along the way. We even know of some lenders who offer a conventional business loan option, a 7(a) option AND a 504 option. In this current economy that may be a stretch in many cases but the point is, options are possible and can be attractive to borrowers.
So what is your approach to incorporating SBA lending into your lending services? Do you have an approach that keeps the loan process fairly simple and free of too many redundancies? Do you gather much of the same information up front that will be required for either a conventional or an SBA loan? These are the kinds of questions we encourage lenders to contemplate when they are creating an approach to do meaningful SBA lending volume. It should be noted that there is not one absolute correct answer for these questions. So much depends on the natural work flow within a culture. Who does what and when within a work group? In many cases, we believe it makes sense to gather as much as possible the first time so that the second round can be focused on just a few missing things rather than a laundry list of items.
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If conventional policy requires just 2 years of financial statements and tax returns, and you know you'll need 3 years for SBA, why not just get the 3 years in the first place?
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If the transaction involves a business acquisition, how about getting a copy of the purchase contract AND adequate seller financial information (including IRS 4506 authorization) up front to mitigate surprises and possible delays later?
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If refinancing is requested, getting clear on eligibility earlier in the process might clarify the options better which should save time and effort later.
We all know that SBA lending adds layers of questions, of compliance, and additional paperwork to the process. But when you boil it all down, is it really that bad? It doesn't have to be. When we work with clients either on an outsourcing or consultancy basis, we help produce measurable outcomes that can be tested for the Three "P's":
Prudent Lending- Sound deals, properly structured and documented, and well maintained
Productive Process- Efficient process featuring the right people, doing the right things, at the right time
Profitable Portfolio - Quality portfolio that is priced right and managed effectively
If you and your colleagues are contemplating an expansion of your small business lending (conventional AND SBA), feel free to give us a call for a free consultation on possible ways and means to take the next step. Visit us online at www.sbaAccess.com to learn more about our services or call us at 972.301.4601 to schedule a brief discussion about the Three "P's" in your organization.
Take the Right Approach
Brian Burke and Karen McHugh
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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