The 5 “P”s: What is your Plan? Part 3
How Much Does It Cost to Get Started and When Should We Expect to Break Even?
With any new business plan, we want to know all about the investment needed and the timeline to profitability. As a Commercial/SBA Lender, you need this knowledge to determine the credit strength in any new deal. When a bank is considering investing in a new SBA lending platform, it is just as vital to fully understand the costs associated, the variables involved and the timeline to profitability. Recently, one of my new clients told me that they had already completed the “budget” for a new SBA lending initiative at the bank. Like many created “budgets”, it was a quick view of what was to be expected. Adequate for exploratory purposes, but not when you decide to commit to an SBA lending platform.
I was asked by this client to complete a 3 year SBA departmental budget. When completed and compared to the budget created by the bank, they could not have been more different. I completed two models for 3 years each. The first showed results based on holding all the loans. The second model showed results based on selling the SBA guaranty portion on the secondary market. You can probably guess which one made money in the first year and which one did not show a profit until late into the second year.
There are so many variables that need to be considered in an SBA budget:
Forecasting how many loans to be approved and funded in each of the 3 years.
What average loan size to anticipate?
What average pricing on the loans should be targeted?
How many days or weeks from initial approval to a closed and funded loan?
What incentive should be paid to commercial lenders for doing an SBA loan?
Should we pay broker fees and how much?
If we sell the SBA guaranty, what average pricing should be expected?
Should you charge a packaging or processing fee and if so, how much?
Should we totally staff the department or utilize a Loan Service Provider (LSP) until loan production proves full time staff are necessary?
Who and what skill sets are needed first as you get started and how much will they cost?
What percentage of total loan production should be calculated for Loan Loss Reserve?
What should be spent on marketing?
Should we just use internal commercial lenders or hire dedicated SBA lenders?
What incentives and how much should be considered for SBA BDOs?
What other “best practices” should be accounted for including software, training, etc.?
And there are many other questions or variables that need to be taken into consideration. But when the budgets are completed, management can have a very clear understanding of the costs involved and when and what and how much money can be made in each of the first 3 years.
Solid information for making sound decisions about starting and growing an SBA department makes a huge difference in those new SBA lenders who succeed in a big way and those that don’t come close to meeting expectations.
(For more information and assistance in developing an SBA department budget, please contact tim@SBAadvisors.com)
“The Top 5 Requirements to Starting or Expanding an SBA Lending Platform” written by Tim Terry, CEO of SBA Advisors.