Gone are the days when SBA was considered the lender of last resort. Now, the SBA loan can be a tool for lenders to assist good clients who may have an issue that precludes normal financing. So how does a lender recognize a possible SBA loan?
Below are three common scenarios:
- A potential client with a sound business plan and reasonable and proven projections applies for a start-up loan. The owners and management are experienced entrepreneurs with a wealth of experience in their industry. The only one of the five C’s of credit not covered is collateral, which is not one to one. Your bank’s policy does not allow loans to start-ups. This credit request could potentially go an SBA loan program route.
Pointing to possible SBA 7a loan: Start up business, collateral shortfall.
- An existing client requests that you refinance an equipment loan with a three-year term from another bank. The purchased equipment has a life of ten years. You can refinance at a lower interest rate, which will result in well over 10% monthly cash flow savings; however, your loan policy does not allow for equipment loan terms over five years. SBA loan program guidelines allow for equipment loans with terms up to the useful life of the assets financed.
Pointing to possible SBA 7a loan: Longer term needed, debt refinancing with a 10% or more increase in cash flow.
- A client requests a 20 year term loan to purchase the real estate where its business is located, but only has 10% down payment available. Your credit policy requires 20% down, and will only allow a 10-year term. If the business is profitable and cash flow supports it, this loan request could be an SBA loan with a term as long as 25 years.
Pointing to possible SBA 7a loan: Lower down payment, longer term than bank policy permits.
The most common reasons SBA loans are used:
1. Inadequate collateral (LTV); and
2. Borrower’s needs and loan parameters such as down payment, business type and loan term do not fit within bank policy.
If all other credit pieces are well supported and documented in your credit memorandum and acceptable, a 7a loan can mitigate a credit weakness, be it collateral shortfall or a new business/start up, term requirements, or other such issue. SBA lending is primarily cash flow lending and not collateral based but should include a secondary source of repayment.
Certain industries such as speculative businesses, real estate investment businesses generating passive income, and businesses engaged in political lobbying are not acceptable within the SBA programs.
With training, resources and knowledge, Lenders can drive the SBA loan process by identifying credits best suited for an SBA guaranteed loan.
Lisa G. Lerner is principal of Enhanced Consultive Solutions LLC (ECS). With more than 35 years of experience in the financial arena, she founded ECS in 2004 to assist small and midsized lenders with their loan operations, primarily in government-guaranteed lending. Lerner’s experience includes overseeing national and regional loan-processing centers for government-guaranteed loan programs. Previously, she was chief operating officer at RLC Financial, an asset-based finance company.