In last month's article, we discussed increasing your non-interest income through selling the guaranteed portion of a government guaranteed loan. Let’s take this idea further by exploring ways you can structure loans to garner higher premiums.
Most banks that utilize SBA/USDA loan guarantees subsequently sell the loan on the secondary market. Maximizing the premium on the sale of the loan is one key way to ensure profitability as you support local businesses.
The following tips have the most dramatic effect on the amount of the premium you receive.
1. Set a calendar quarterly change period on the interest rate. This one step has more effect on the premium than anything else. The people who buy the loan want to know that if interest rates adjust upward, they will share in the reward. This can mean a significant increase on the premium when you sell the loan.
2. Adjust the length of the loan term. Lower payments are in the best interest of most small business owners; they benefit tremendously from the opportunity to build cash inside their company. Extending the term of the loan for at least 10 years helps keep repayment manageable – and also has a positive effect on the loan premium. Going below 10 years on the loan term can cause as much as a 30% reduction in the premium.
3. Maximize the spread over the Wall Street Journal Prime Rate. Right now, the maximum SBA 7(a) loan rate is 2.75% over the Wall Street Journal Prime Rate. The maximum rate should be utilized as much as possible for a positive effect on loan premiums. For borrowers, the longer term keeps payments low, offering more benefit than a lower rate of interest.
If you'd like to learn more about why community lenders throughout the Midwest are partnering with VITAL Financial Services to maximize profits and minimize risk through SBA lending, contact us.