What’s to like (and not like) with the various SBA programs?
There's a lot of noise these days about ARC (America's Recovery Capital), the new $35,000 fully guaranteed SBA bridge loan program, part of the Stimulus package passed earlier this year. Fair enough, it's new, it's interesting, and it deserves our attention at least long enough to reasonably decide if this program makes sense for a designated set of prospective small business borrowers. And let's face it, many lenders see this as putting themselves "between a rock and a hard place", so you have to take a position and be prepared for the consequences either way.
After all is said and done, we believe the ARC discussion really boils down to process and customer service. Do you have a small ticket business loan program (ideally a fully operational Express shop) today? If yes, then ARC may well make sense for you. You can take this 32 page guide - ARC Loan Program Procedural Guide - into a conference room with a small task force, tear it apart, figure out the "musts" and adapt your process. You will need to figure out the communication piece of course, both internally and externally and that's not ever as easy as people think it should be. And regarding customer service, this could be a good program to help viable, but needy, bank customers (which certainly helps and maintains that ongoing relationship).
If you don't have the existing infrastructure (policy, procedures, trained staff, technology etc) to handle higher volume of lower dollar loans, then you are probably not going to be able to participate. By the time you get it all figured out, perhaps the short term subsidy dollars for this program will be gone, anyway. But of course, nobody really knows. What we do know, is this program is harder to execute than many in the SBA or in Congress would have thought. In the end the numbers (and the timing) will tell the story.
So, what about the other programs? Let's not overlook the "bread and butter" SBA programs, SBA 7(a), Express and 504 and the different procedures for 7(a) - PLP vs. standard or non PLP processing. We thought it might be timely to just call out a few practical Pluses and Minuses for each program and process. If you have been around one or more of these programs for awhile, you no doubt have come to your own conclusions about what you like, and even don't like about SBA lending. By sharpening the focus, perhaps you and your organization can better decide on adding or dropping one of these from your toolkit.
Our "take" has been formed over many years, from personal direct experience as well as many in depth conversations with lenders just like you. We hope this provides a sampling of perspective and some real value as you compare and contrast these programs.
SBA 7(a) Guarantee Loan Program
Pluses:
- Long term (up to 25 years)
- Fully amortizing (no balloon)
- 75% guaranty (currently at 90%, what a deal!)
- Variety of business loan purposes including permanent working capital.
- Pricing is competitive
- In normal times lenders have found ways to control costs, minimize losses and optimize profits on this program, often north of a 3% ROA.
Minuses:
- As volume increases, so does the intensity of the process and staff requirements
- More costly to produce than like sized conventional loan due to the extra compliance components (eligibility/quality control and loan authorization compliance)
- Risk of losing the guaranty or at least getting a repair (discount) of the guaranty
- Prepayment penalty on loans paid down early in the first 3 years
Preferred Lender Program or PLP - 7(a) delegated authority process
Pluses:
- Autonomy to make a call without Uncle Sam looking over your shoulder
- You can design a process that is efficient and quality based so that is good for you the lender and your customer
- Speed - typically PLP can be done more quickly than standard process which can be a competitive factor and provide the borrower with excellent service
Minuses:
- Added responsibility, we call it "lending without a net".
- Expertise and depth of knowledge becomes greater as responsibility is increased
Non PLP - 7(a) standard process
Pluses:
- You get SBA to weigh in with you on eligibility and structure (more hand holding by SBA)
- Necessary to mitigate a preference or conflict of interest situation
Minuses:
- Timing. It usually takes a bit longer in process than a PLP loan approval
- Sometimes SBA will add extra requirements to the approval, which may be more cumbersome
SBA Express
Pluses:
- The lender uses a lot of their own forms (to mirror their conventional processes)
- The lender gets off the hook on some onerous requirements such as verification of business purpose on a credit card refinance. A simple borrower certification will suffice
- Revolving line of credit feature. (not available with the standard 7(a) program)
Minuses:
- Express is a diluted guarantee of just 50% so in normal times, you're giving up 25% for the streamlined features. Currently with 7(a) guarantees running 90%, you're leaving 40% on the table. That's no small percentage of guarantee.
- Loan size is limited to $350,000 (unless you utilize the Patriot Express up to $500,000)
SBA 504
Pluses:
- Safe loan to value (often 50% or less)
- Favorable long term financing. Bond rates delivered to Main Street
- Fixed rate of interest on the CDC note for the borrower (nice feature to offer)
- Larger projects are doable (because the project is split between two lenders - the CDC and the 1st mortgage lender)
- Brand new program enhancements that allow for debt refinancing (if there is a business expansion)
Minuses:
- Inconsistent delivery system. If you get to work with a great CDC, your problems are solved. But if your CDC isn't so great (they are slow, inconsistent, change their minds midstream - also known as "adverse change" shy), you and your customer can be put in an uncomfortable and even difficult situation.
- Often slow workouts. While the 1st mortgage lender (3rd party mortgagee) should never lose on principal, protracted workouts, less control can lead to a longer non- accrual period, thus a drag on earnings
- Cumbersome prepayment penalty process (difficult to explain and burdensome to the borrower in early years)
So there you have it, condensed pros and cons of the key SBA loan programs and processes. For a practical, thumbnail side by side comparison of the programs, take a look at our Free Resources & Job Aides on our website. You may want to discuss the differences in the program with us or other colleagues out there to get the "industry vibe" on something you would like to know. If so, look for e-networking through "Special Access" on our website.
If you or your group would like to go deeper and really make some strategic and practical day to day policy and procedural changes in how you approach SBA lending, perhaps the specialists at sbaAccess can help you. Give us a call for a free consultation or visit us at www.sbaAccess.com to learn more about what we can do for you. After all, comparing the programs is easy; execution is where it gets interesting.
Take the right approach
Brian Burke and Karen McHugh
