I recently came across this article, and was struck by one important paragraph it contained. While the focus of the article is the shortage of commercial lenders, I realized that the author had actually included within the text an excellent formula for SBA lending success.
The article offers four elements needed to help commercial lenders close loans. I thought the advice was wise, and just so happens to form a solid foundation for a robust and successful SBA lending program as well. With the author’s permission, I’m reiterating her advice, but adding my perspective on how it applies to SBA lending.
But, it must be noted: there’s one important factor required for any of these recommendations to come to fruition and work effectively.
Success – in all areas of lending – must begin at the top. With that in mind, here is my advice to bank management when it comes to helping your commercial lenders be successful at SBA lending.
1. Your lenders must believe in the bank’s vision and have the ability to offer the right products to the right customer base in your specific market.
SBA lending is Commercial & Industrial lending. Many community banks are walking by the valuable C&I business right in their backyard, and it's flowing to the big banks instead. I often hear, "We just don't have much C&I business in our market." These same lenders are shocked when I run the manufacturer data for their surrounding counties, and it reveals the dozens – even hundreds – of untapped business opportunities within miles!
C&I businesses have unique financial needs, and often find themselves unable to qualify for conventional financing. Ask yourself: Is your bank friendly to C&I credits? Are you willing to provide not just real estate loans, but equipment and working capital loans to all types of C&I borrowers, such as manufacturers, wholesalers, heavy highway contractors, land improvement contractors, building contractors, mining companies and trucking companies? Are you willing to provide permanent working capital through a term loan when it is needed, even though there will not be collateral to secure the working capital portion?
2. Lenders must understand, be amenable to, and be able to work within a bank’s credit culture.
As strange as this may sound, I have heard from many front-line lenders that their bank has instructed them to seek SBA loans, but then those same loans never get approved – or even score high enough be submitted to the loan committee for approval. If a lending institution wants to participate in SBA programs, they must pave the way for their lenders before asking them to find loans. This includes:
Deciding which industries to underwrite and what the companies in those industries should look like.
Defining why your institution will seek guarantees from the SBA. In your credit memo, the SBA requires a discussion of “Credit Available Elsewhere” as part of the bank's underwriting process. In other words, why is credit not available at your bank or elsewhere in your market to this company on reasonable terms? Does the business lack sufficient collateral, need a longer term, or have higher leverage than you are typically comfortable with?
Determining what credits your bank is willing to underwrite and under what conditions. If you have a credit that your bank is willing to do without an SBA guarantee, then this credit is not eligible for a guarantee.
3. Your lenders must have the ability to be competitive through rates, process or service.
I actually discourage lenders from competing for SBA loans based on rate. Instead, stand out from the competition by serving as the go-to relationship lender for businesses in your market. Banks must be compensated properly for the risks associated with loaning money to companies that need a guarantee, and reducing rates won’t accomplish that.
Your institution must be willing to do loans, secured by a guarantee from the SBA, that other institutions are unwilling to do. This does not mean extending credit to companies that cannot repay their loan! This means extending credit to companies that can repay their loan, but lack something else; usually collateral, capital, down payment or work in an industry that is experiencing difficulty locally or nationally.
In addition to credit, many SBA borrowers need extensive treasury management services, company credit cards and/or credit card processing, employee benefit plans and payroll services. All these product offering decisions should be made prior to sending your BDOs on their first call.
4. Your lenders need to have confidence that your back office can support their loan volume.
It is expensive to have an underutilized SBA back office. Bob Coleman of The Coleman Report estimates that a properly trained and staffed SBA back office adds about $600,000 annually in costs that include salaries, software and training.
This is where VITAL plays an important role for community banks. Outsource your back office to us with no added fixed costs – only a variable cost when you use our services. Your institution should still set realistic goals for SBA production. VITAL can help you be profitable in your first year of committed SBA lending because there is no massive investment in underutilized assets.
Your loan goals can grow gradually based on your appetite for the credits and risk, rather than be determined by the size of your overhead.
That summarizes my key advice. Can VITAL help your bank with a profitable SBA strategy? Contact us anytime.