Tip of the Week

Choosing the “right” SBA loan program for your Borrower

Historically the debate in SBA lending circles has long been: which loan program is better?  Which one offers the customers better rates, lower fees, or the most flexibility?   Or from the lender’s perspective, which program offers the better balance between risk management and shareholder profitability.   Perhaps you’ve seen spreadsheets that compare the two programs and depending on your viewpoint or agenda, the story often favors one program over the other based on assumptions going into the model.

In this era of reframed questions, how about asking:  which one works – for the customer and for the lender?  Like so many good questions in SBA lending, the right answer often is – it depends!

It depends on the vision and plans of the borrower.  Does she want to buy a large owner occupied piece of real estate for her business?   Is she interest rate sensitive, preferring a slightly higher fixed rate to a lower (at least currently) but variable interest rate?  Is she certain that she will not need to prepay the loan anytime soon?  Is she flexible about working with two lenders (the bank and the CDC)?  These are some of the fundamental questions.  If she answers yes to any or all of these questions, the 504 loan program may be her preferred option.

It depends if your borrower is looking for a loan to support a blended or mixed use of proceeds.  Does he want to purchase real estate but also get financing for working capital, perhaps refinance some improperly structured debt, or buy short term equipment or supplies?  If he would prefer to have one loan, with one lender for up to 25 years – he might prefer the 7(a) loan program.

It depends on the risk mitigation strategies and profitability approach of the lender.  If you and your colleagues are more concerned with a low loan to value and virtually no risk of loss on commercial real estate mortgages versus larger loan amounts with a partial government guarantee – 504 may be for you.  But if you want to offer the flexibility of multi loan purposes, longer terms, and at least currently, lower rates – then 7(a) may be the way to go.

Aren’t there many situations where both SBA programs could be utilized to help a borrower?  Of course!  So it’s all about choices, needs, and laying out the parameters, apples to apples – side by side.  There are many ways to compare the differences:  program parameters, program costs, program eligibility.  Just a few differences to consider are:

                                                            504                                                               7(a)

Max Loan Amounts         CDC loan limited to $1.5MM                 SBA loan limited to $2.0MM

                                  But remember that’s just 40%                       But gty portion is limited to$1.5MM Max Loan Term               CDC loan: 10 yr equip; 20 yr R/E          Based on life of asset financed

                                      Lender loan: 7 yr equip; 10 yr R/E         7-10 yrs working capital

                                                                                               10-25 yrs equipment

                                                                                                25 yrs + for real estate

Int. Rate Max.                CDC loan based on US Treasuries         Lender loan based on term

                                     5 yr (for 10 yr loan) and                         < yrs = P+2.25%

                         10 yr (for 20 yr loan) Treasuries              7 yrs or more = P+2.75%

Size Standards               Tangible N/W of $7.5MM or less           Based on NAICS ind. standard

                                     And Average Net Income for                  Retail – gross sales averaged

                                     Last 2 FYs of $2.5MM or less               over last 3 FYs

                                                                                               Wholesale & Mfging - # of emp

                                                                                               over last 12 mths

Equity Requirement         Personal debt counts as equity             Personal debt must be repaid by

                                                                                                sources other than c/f of bus.

Collateral Coverage          “Adequately” secured                           “Fully” secured

Real Estate Appraisals     USPAP threshold based on                  USPAP threshold based on

                          property value of $250,000                    loan amount of $250,000           

We recommend the use of an electronic tool or spreadsheet that lays out in matrix format common issues to both programs and steps you and your borrowers through a decision process.  Many successful SBA lenders actively use such a program both internally and often with their clients.  Your customers will appreciate the opportunity to compare and contrast their specific needs into an easy model that can help formulate the ideal approach for them.

When we work with our clients we offer multiple tools and job aids to help streamline the SBA lending process to take the guess work out of the process so that it just works better.  We’re happy to help you make your processes work better.  If you’d like help with questions relating to your delivery of SBA lending solutions, feel free to ask us about how we might be able to help.

Take the right approach,

Karen McHugh and Brian Burke