Why SBA Lending?
SBA-guaranteed loans offer lenders and borrowers a wide range of advantages not available through conventional commercial loans.
On the borrower’s side, SBA loans provide small businesses with much-needed capital that may be otherwise inaccessible through traditional financing. They also offer the ability to provide more flexible lending structures, like longer loan terms and smaller down payments, that can help businesses that fall outside of a lender’s normal credit guidelines maintain cash flow
and achieve sustainable borrowing ratios.
Lenders also receive significant benefits, the most obvious being a government guarantee ranging from 50% to 90%, depending on the specific program guidelines.
Regardless of the specific program, the lender’s risk of loss is significantly reduced, allowing lenders to serve borrowers that may be slightly outside of their organization’s risk tolerance guidelines for conventional loans.
SBA loans also help lending institutions comply with Community Reinvestment Act requirements, in that they encourage them to support economic growth in the communities they serve with reduced risk. Of course, SBA lending is also a great way to grow fee income, through SBA-approved origination fees, as well as by retaining of a portion of the interest as servicing fees on sold loans.
Despite these numerous benefits, SBA lending does present some unique challenges. The SBA’s loan process can be complex and difficult to navigate, especially for lenders without access to experienced, knowledgeable experts.
SBA loans also carry unique risks. In addition to the standard credit, collateral, interest rate and concentration risks inherent to conventional loans, SBA lenders must adhere to strict documentation, underwriting and borrower qualification guidelines to reduce the risk of losing a guarantee.
To mitigate these risks and pain points, lenders must have ready access to expertise in this unique lending niche. But such talent is hard to find. Lenders often choose one of two paths: they may decide to hire experienced SBA loan officers and underwriters from the outside, at a significant cost. Or, they may choose to invest in training in-house staff over time. This is not necessarily a more cost-effective route, as such training takes time and significant internal and external resources. Inexperienced SBA lending staff can be expected to make mistakes and face a steep learning curve early in their careers. Once fully trained and with experience under their belt, these newly minted SBA experts may choose to take their talents elsewhere.
Even with the right structure, sufficiently expert staff, and resources at your disposal, SBA lending is time consuming and paper intensive. In addition, you may have had a bad experience with SBA lending in the past and are feeling gun-shy at taking another shot.
But, don’t let these fears slow you down. With the right structure in place, SBA-guaranteed loans can generate significant fee income and be a profitable segment of your well-diversified commercial loan portfolio. In addition, there is a third path— outsourcing—which can reduce program risk and expense significantly.
If you’re ready to take a fresh look at the SBA opportunity, here are some keys to getting started off on the right foot:
5 Keys to a Successful SBA Program:
1. Match program goals and policies to your risk tolerance: Begin by setting realistic program goals that consider your target market, lending capacity, access to internal and external resources, and appetite for risk. Before moving on to the next step, ensure you have prudent, well-vetted loan policies to match your goals. These policies should conform with the SBA’s underwriting guidelines and standard operating procedures (note the latest version, SOP 50 10 6, took effect on October 1, 2020).
2. Ensure you have expertise on staff (or on hand): The underwriting and processing functions are the best places to invest in experience. Accuracy is critical to ensuring the viability of your SBA loan guarantee. If you don’t meet the SBA’s underwriting criteria to the “T,” obtain proper documentation and follow all reporting requirements, you are placing your guarantee in jeopardy, potentially costing your institution hundreds of thousands of dollars in loan losses down the road.
But top talent is in high demand and you will pay a premium to acquire it. Starting out, expect to pay up to $300,000 per year for a small back-office department consisting of an SBA loan underwriter, processor, and servicer, and associated overhead expenses such as office space,
software and equipment.
3. Streamline your processes: Having the right people in place is important, but so is creating a consistent, coordinated process. Too many financial institutions make the mistake of assigning key SBA lending process steps to various disconnected employees around the organization, who may lack an understanding of SBA lending and a transparent view of the overall process. For example, an institution may use its commercial underwriter to write up the loan, a “packager” to prepare the SBA loan application, and a closing department to close and fund the loan. If the individuals assigned to each critical step don’t have a good understanding of the overall objectives and how the other functions are performed, mistakes will happen. It is crucial to establish double-checks throughout the process, to backstop human errors and discrepancies that could put your SBA guarantee at risk.
4. Source for success: Lenders can choose among three routes for sourcing SBA loans. You can train your existing commercial lending staff to identify qualified SBA prospects, hire an experienced SBA loan officer or work with a loan broker.
Each path has its pros and cons. Training your existing staff may be the most cost-effective in the short run, but it will take longer to build up your pipeline of qualified opportunities. In contrast, hiring a proven SBA business development officer from the outside may pay immediate dividends, but at an additional cost of $80,000 to $100,000 per year, plus benefits and bonuses if they are successful in reaching their volume goals.
The broker-sourcing approach can be a good choice for lenders new to SBA lending. Since brokers charge a commission on each loan booked; it won’t add any fixed expense to your overhead. And top brokers can help you quickly develop a steady pipeline of qualified deals. Expect broker commissions to add roughly 1% to 1.5% to your variable cost structure.
5. Save money by outsourcing back-office operations: Most commercial loan departments can benefit from outsourcing some, or all of their SBA lending processes to an experienced third-party firm, often referred to as a lender service provider or “LSP.”
The SBA Complete Difference:
Whether you’re new to SBA lending and wish to explore this profitable opportunity, or an existing SBA lender looking to expand your current program efficiently and cost-effectively, SBA Complete offers a low-risk, high-reward solution.
As the most experienced full-service SBA lender service provider (LSP) in the country, SBA Complete will work with your existing staff and operations in its role as the nation’s Premier SBA Outsourcing Solution.
SBA Complete handles all the details required for sourcing, originating, closing, reporting, and servicing a portfolio of SBA loans, including:
• Fulfillment: credit analysis, loan packaging, processing, closing, doc prep, payout, and servicing, analyst.
• Loan Sales: guaranty purchases, secondary market, and management
• Portfolio servicing: compliancy, releases, rate changes, re-amortization, payment collection, loan liquidation
• Sourcing: connecting quality borrowers to your institution
• Support: from our SBA specialists, helping you develop policies and procedures, provide coaching and training for your staff, and full portfolio reviews of new or legacy SBA loans.
In addition, there are no upfront costs to trying SBA Complete, and no commitments required. Whether you are new to SBA lending, or have already given it a try, SBA Complete offers a zero-risk approach to boosting your fee income line and serving your customers’ needs.
To learn more about a customized solution fit for your SBA needs, reach out to schedule a meeting.
About SBA Complete:
SBA Complete is the largest and most experienced outsourcing service provider in the SBA industry. Our leadership team has over 100 years in combined lending practice, the base of that knowledge contributing to our streamlined and efficient processing model.
To start earning non-interest income on SBA loans, contact us today at 1-800-801-2378, or visit us online at sbacomplete.com.