The 5 “P”s: What is Your Purpose?

Purpose

(This is a blog series written by Tim Terry, an SBA expert with almost 30 years of experience in setting up SBA lending departments)

Why can SBA lending be the most successful and profitable program offered by your lending institution?  Why do some SBA lending institutions grow rapidly and others never seem to achieve their potential?  When the economy slows down, why does SBA lending increase?  Many great questions need great answers!   

This blog series will focus on answering these questions and more.  While the SBA loan program has literally doubled in size in the past 5 years, the SBA industry experts expect it can double again in the next 5 years. Every commercial lender should be considering the strategic utilization of the SBA 7(a), SBA 504 and the USDA B&I programs for significant loan growth and fee income. 

This series will focus on the 5 P’s for the successful launch or expansion of SBA lending.  These 5 P’s will provide the basis / outline for your SBA lending PLAN which is critical in gaining acceptance by your senior management (especially your CCO) and the board of directors. 

The first is “Purpose”.  Let’s start by discussing why your lending institution should be doing SBA lending? 

 Strategic reasons include but are not limited to the following:

1.      Saying yes to more customers.  These government credit enhancement programs provide for a much longer amortization than commercial loans.  Longer term simply means no balloon payments and improvement in debt service coverage.  As a slowdown in the economy occurs, reduced cash flow impacts most businesses.  What might have been a traditional conventional loan last year, now becomes an SBA opportunity, simply due to longer amortization. 

2.     Improving customer’s cash flow is also a very vital reason for SBA lending.  One simple example would be using a longer amortization for refinancing loans with shorter terms and higher interest rates. 

3.     Inadequate collateral will kill a new deal.  SBA loans are based more on cash flow / debt service coverage than collateral.  How does a lender do a commercial loan for a retail store in a leased location with virtually no collateral?  If the customer meets the other “Cs” of credit, the SBA guaranty, typically 75% (but can go as high as 90%,) addresses the lack of adequate collateral.  In fact, I think we all would prefer to have a guaranty from uncle Sam than having “dad sign the loan.”

4.     Improving your CRA is becoming critical for those lending institutions seeking to add locations or buy other lending institutions.  There is no faster way to do this than by establishing a strategic plan and implementation of an SBA lending platform. 

5.     Selling the SBA guaranty portion of the loan helps the lender generate fee income.  The secondary market for SBA loans is vibrant.  When demand for very secure investments rises, so does the secondary market.  The SBA industry has averaged better than 110 on the sale of the guaranteed portion of the loan.  Add another 1% on-going servicing fee and you can begin to understand the profitability impact of SBA lending. (see note 1 below).

6.     Historical statistics show that implementation of marketing an SBA program leads to an average increase in commercial loans of 15%. 

7.     Loan growth, especially in a highly competitive environment requires great “brand identification.”  Marketing SBA lending provides a huge attraction to new business.  How many lenders do you know that actively promote a strong commitment to small business?  And the lack of this marketing effort allows for national SBA lenders to come into your market and steal existing and new customers.  These national lenders with no locations even in the same state, spend a lot on marketing.  To compete, your lending institution needs a strategic marketing plan specifically to attract quality loan customers.  When a potential loan customer starts thinking about where to get a loan, you want your “Brand” to be first on everyone’s mind. 

 While all these reasons give cause for great consideration to SBA lending and form your “purpose”, these are the positives.  In the next blog, we will discuss the government and loan compliance aspects of SBA lending.  This can be a daunting challenge unless you have your plan in place to address it.

*Note 1:  For a financial comparison of the profitability of an SBA 7(a) loan, sell vs hold, please contact the author at Tim@SBAadvisors.com.