Maximizing the SBA Opportunity

Government-guaranteed lending is in high demand. In FY 2018, the U.S. Small Business Administration approved a total of $25.8 billion in 7(a) loans, its most popular program, according to a June 2019 SBA report. This was among the highest volume of loan approvals made in the history of the 7(a) program.

It’s easy to understand why. SBA-guaranteed loans offer lenders and borrowers many advantages not available through conventional commercial loans. SBA loans provide small businesses with much-needed capital that may be otherwise inaccessible through traditional financing. More flexible lending structures, like longer loan terms and lower down payments, can help businesses that fall outside of a lender’s normal credit guidelines maintain better cash flow and achieve sustainable borrowing ratios.

Lenders benefit from SBA guarantees of 50% to 90%, depending on specific program guidelines. This reduces lenders’ risk of loss and allows them to provide loans they would not be able to offer otherwise. SBA loans also help lending institutions comply with Community Reinvestment Act requirements, allowing them to support economic growth in the communities they serve with reduced risk.

Despite these significant benefits, SBA lending is a complex and highly specialized line of business. Seasoned credit experts can devote years to learning the government’s numerous, nuanced requirements. The demand for such staff is competitive, and they command high levels of compensation.

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.

But with the right structure, SBA lending can generate significant fee income and be a profitable segment of an institution’s well-diversified commercial loan portfolio.

Three Keys to a Profitable SBA Program

If you are considering launching an in-house SBA loan program or partnering with an existing operation as a correspondent lender, these three tips will help you get off on the right foot.

1.  Sourcing 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.

2.  Don’t skimp on expertise: 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.  Lock down your process: 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.

A Better Approach

SBA lending can be a highly lucrative line of business, but the barriers to entry are high. Fortunately, quality SBA department outsourcing solutions are available to help lenders establish a smooth-running, compliant and profitable program quickly and efficiently.

An experienced third-party firm can serve as your SBA back office, handling all aspects of the process from sourcing, underwriting, packaging and processing, through required 1502 reporting and annual due diligence. Better yet, outsourcing is an affordable solution with few if any upfront costs.

SBA lending enables financial institutions to provide small businesses with much-needed financing, deepening relationships and expanding their reach in the communities they serve. Outsourcing your back-office operations to an experienced third-party firm is a proven, low-risk way to add this lucrative opportunity to your commercial lending program.

Brian Carlson is CEO of SBA Complete.

Dina Kroshkin is SVP of Client Services for SBA Complete. They can be reached at 424-277-3531 or connect@completels.com.