From leveraging PPP technology to building relationships, reasons for boosting SBA lending are numerous.
Offering SBA loan origination can expand your product offerings to win deals with prospects and existing customers or members.
Far fewer financial institutions regularly participate in SBA (7a) lending than the more than 5,000 that joined the PPP.
The SBA has information on all of its loan programs on its website for lenders interested in expanding beyond the PPP.
In a recent survey of more than 250 bankers representing banks and credit unions, 61% of respondents said their financial institution plans to maintain or increase SBA loan origination this year and beyond.
With the Paycheck Protection Program (PPP) lending window closed, are there benefits for banks and credit unions that increase participation in ongoing Small Business Administration (SBA) loan programs? Here are five reasons, according to industry experts.
SBA loan origination can leverage PPP tech, experience to expand relationships.Many financial institutions implemented or upgraded technology to help them offer PPP loans during the pandemic. These lenders could be looking to leverage those SBA technology investments and the SBA experience they gained to develop or solidify small business relationships. Remember: PPP lenders that were not already authorized to make loans under the 7(a) and other programs before the PPP will need to execute new loan agreements with the SBA.
Even if community businesses don’t end up utilizing the federally guaranteed loans, many small businesses have heard of SBA loans and want to explore them. By marketing that your financial institution offers SBA loan origination, you provide additional products that expand opportunities to businesses. One requirement of many SBA loans is that the business is otherwise unable to access credit on reasonable terms and conditions. Businesses with healthy credit might initially inquire about an SBA loan but end up taking out a regular small business loan from your bank or credit union.
Stimulus enhancements make SBA 7(a) lending more attractive.In addition to boosting 7(a) loan guarantees to 90% (up from 75% for loans of more than $150,000 and from 85% for loans of up to $150,000), Congress approved fee waivers and funding to cover up to six months of principal and interest payments (up to $9,000 a month) on 7(a) and 504 loans approved between Feb. 1 and Sept. 30.
Offering SBA loans might mitigate portfolio risk by boosting business success.SBA loans can (and should, according to some experts) be considered by lenders to refinance existing debt in a bank or credit union’s portfolio to mitigate risk. SBA borrowers cannot use 7(a) loan proceeds to refinance existing debt where the lender is likely to sustain a loss and the SBA would take over that loss through refinancing. However, lenders might consider SBA options for their customers or members to help shore up the businesses to survive. During Abrigo’s recent ThinkBIG Conference, credit underwriting and loan portfolio risk management trainer and consultant Michael Wear, CRC, of 39 Acres Corp. said now is the time for lenders to “triage” their portfolios. “We know 2020 stunk,” he said. “As soon as we get those fiscal year-end financials, we might need some mitigation. I’d say do it right now.”
Wear noted that in the 2008 financial crisis, when the SBA similarly increased guarantees of 7(a) loans to 90%, it ran out of funding before the end of the fiscal year. “I would hop on SBA and USDA guarantees right now,” he said. “But to determine if you need to do that, you’ve got to get the quarterly financial information, and you’ve got to triage your portfolio to identify the ‘weakest in the room.’”
Through June 18, the SBA had approved 7(a) loans totaling $18.2 billion so far this federal fiscal year, out of a $30 billion authorization limit, according to SBA data.
SBA loans are a source of much-needed non-interest income.The guaranteed portions of SBA loans can be sold in the secondary market, typically at a price above par, and the financial institution can retain the servicing rights and related fees for the unguaranteed portion. This provides non-interest income for institutions at a time many banks and credit unions continue to struggle with shrinking net interest margins given low interest rates. "In the secondary market, guaranteed loans are liquid and command a premium. Investors buy these loans because the interest rates are generally high compared to the risk, as the only risk the investor incurs is prepayment risk," the FDIC said in a "Supervisory Insights” article. The lender retains all servicing rights for sold loans and must follow the servicing requirements in SBA's rules but receives a monthly minimum servicing fee of one percent on an annualized basis on the unpaid principal amount of the guaranteed portion of the loan that is sold at a premium, according to the FDIC.
SBA loan origination can be especially lucrative for financial institutions now. “Recently, premium levels for SBA and USDA guarantees have reached historically high levels,” SBA loan servicer and consulting firm Holtmeyer & Monson said in a recent newsletter to clients. “For example, a new 25-year SBA loan with a rate of prime + 2.75%, and a calendar quarterly adjustment will generate a premium of more than 20 points. This income, coupled with a guarantee equal to 90% of the loan, adds up to a great revenue opportunity for SBA lenders.” The firm offers a SBA loan yield calculator to estimate how SBA lending might work for an institution.
More than 5,000 financial institutions participated in the PPP, but fewer than 1,700 lenders provided 7(a) loans in fiscal year 2020.
The SBA loans available for lenders to offer to small business customers aren’t just limited to standard loans under the SBA’s flagship 7(a) loan guaranty program, named for Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended). The SBA also has other 7(a) programs offering streamlined or expedited loans for specialized borrowers. These programs include SBAExpress and Export Express loans.
However, as lenders learned during the PPP, all SBA loans come with detailed technical requirements for underwriting, servicing, and liquidation, so lenders need to understand the particulars.
SBA 7(a) loans have a maximum term of 10 years, except for some loans financing/refinancing real estate or equipment, which can be up to 25 years.
Interest rates on SBA 7(a) loans can be fixed or variable, and current rates are posted on the website of Colson Services, the SBA’s 7(a) Fiscal and Transfer Agent (FTA). However, note that in August, the SBA is transitioning its Fiscal Transfer Agent (FTA) for the 7(a) loan program from Colson Services to Guidehouse, a Chicago-based management consulting firm that will migrate the technology programs to SBA’s Capital Access Financial System (CAFS). Guidehouse will assume operational support services for loan servicing, collection, accounting, and reporting from 7(a) lenders and will serve as the Transfer Agent/Paying Agent for the Secondary Market. The change is intended to improve security, integration, reporting features, and validation to improve accuracy. Current and prospective SBA 7(a) lenders will be able to find out information about the program and the transition on the new SBA FTA wiki.
Meanwhile, the maximum allowable fixed interest rates on 7(a) loans as of June 2021 were:
Maximum allowable variable interest rates are determined by a formula based on three acceptable base rates:
In general, borrowers may use SBA 7(a) loan proceeds to establish a new business or to help with operating, acquiring, or expanding an existing business. Specifically, some of the allowed uses of 7(a) loan proceeds include:
For a small business to be eligible for an SBA 7(a) business loan, it must:
SBAExpress loans can be used for the same reasons as 7(a) loans, but they feature an accelerated turnaround time for SBA review. However, borrower debt restructure cannot exceed 50% of the project, and the SBAExpress loans may be used for revolving credit. SBAExpress lenders may charge borrowers somewhat higher variable interest rates than those allowed for regular 7(a) loans. Congress used relief bills to temporarily increase the SBAExpress loan limit from $350,000 to $1 million (reverting to $500,000 on October 1, 2021) and to increase the guaranty rate for loans of $350,000 or less from 50% to 75% in FY2021.
Export Express loans provide exporters SBA-backed financing for loans and lines of credit up to $500,000. Lenders use their own credit decision process and loan documentation, allowing a streamlined method for approval.
Export Working Capital loans are up to $5 million and are for terms of up to 12 months. They are for exporters needing additional working capital to support sales. Lenders and borrowers negotiate the interest rate and there is no SBA maximum interest rate.
The SBA has a wealth of information on its website about its loan programs that prospective lending partners can review. It also has the application form and eligibility requirements for lenders.
Banks and credit unions looking to leverage the technology they purchased for the Paycheck Protection Program, or to leverage the experience they gained offering these SBA-administered loans, might consider pivoting to other SBA loan programs now that the PPP is ending. With several enhancements made to the program through relief legislation enacted by Congress, both borrowers and lenders may find SBA loans more attractive. Lenders may be interested in the non-interest income that can be generated from originating SBA loans and from selling the guaranteed portion of SBA loans on the secondary market. In some cases, lenders might also be able to utilize SBA loans to shore up the finances of existing customers or members, which can mitigate portfolio risk while helping the customer or member and cementing that relationship.
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