3 Reasons to Add SBA Lending

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There were nearly 32 million small businesses in the United States at the end of the third quarter in 2020, according to the Small Business Administration.

That means 99% of all businesses in this country are small businesses, which is defined by the agency as 500 employees or fewer. They employ nearly 50% of all private sector employees and account for 65% of net new jobs between 2000 and 2019.

Many of the nation’s newest businesses are concentrated in industries like food and restaurant, retail, business services, healthy, beauty and fitness, and resident and commercial services. This is a potentially huge opportunity for your bank, if it’s ready and equipped for when these entrepreneurs come to you for financing. But if your bank is not prepared, it may be leaving serious money on the table that could otherwise provide a steady stream of valuable loan income.

That’s because these are the ideal customers for a SBA loan. If that’s not something your bank offers yet, here are three reasons to consider adding SBA lending to the loan portfolio this year.

1. New Avenue for Long-Term Customers
Small business customers often provide the longest-term value to their banks, both in terms of fee income generated and in dollars deposited. But not having the right loan solution to help new businesses launch or scale means missing out on a significant and lucrative wave of entrepreneurial activity. That’s where SBA lending comes in.

SBA loans provide the right solution to small businesses, at the right time. It’s an ideal conversation starter and tool for your bank team to turn to again and again and a way to kick off relationships with businesses that, in the long run, could bring your bank big returns. It’s also a great option to provide to current small business customers who may only have a deposit relationship.

2. Fee Income With Little Hassle
In addition to deeper relationships with your customers, SBA lending is an avenue to grow fee income through the opportunity for businesses to refinance their existing SBA loans with your bank. It broadens your portfolio with very little hassle.

And when banks choose to outsource their SBA lending, they not only get the benefit of fee income, but incur no overhead, start up or staffing costs. The SBA lender service provider acts as the go-between for the bank and the SBA, and they handle closing and servicing.

3. Add Value, Subtract Risk
SBA loans can add value to any bank, both in income and in relationship building. In addition, the SBA guarantees 75% to 85% of each loan, which can then be sold on the secondary market for additional revenue.

As with any product addition, your bank is probably conscientious of the risks. But when you offer the option to refinance SBA loans, your bank quickly reduces exposure to any one borrower. With the government’s guarantee of a significant portion, banks have lots to gain but little to lose.

Banks Brace for Exploding SBA Loan Demand

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It’s hard to run a small business in the best of times. Right now, it’s all but impossible.

“It took me 11 years to get comfortable and make enough money to create a cushion so I didn’t have to worry if the pub had a slow period,” wrote Natasha Hendrix in a recent Facebook post. Hendrix owns McCreary’s Irish Pub & Eatery in Franklin, Tennessee; she’s also my sister-in-law. Business was doing so well that she closed the restaurant to remodel its bathrooms in advance of St. Patrick’s Day — the Super Bowl for Irish pubs.

The complete evaporation of revenue for a small business like McCreary’s is mind-boggling. In 2016, a JPMorgan Chase & Co. study found that the median small business can survive without cash flow for a little less than a month; a quarter of them can make it just two weeks.

Small business owners are left questioning whether they can survive this severe and sudden downturn. “Everyone in this position has to START OVER. Build again,” wrote Hendrix. “Sure, people CAN do it but the real question I have for myself is … do I WANT to?”

“It’s a time for banks to be heroes,” said Curt Queyrouze, CEO of $827 million TAB Bank Holdings, during a recent digital conference hosted by MX.

A number of banks have announced deferrals on loan payments and are offering additional loans; Queyrouze tells me loan growth for term loans to small and mid-sized businesses had already tripled by late March at Ogden, Utah-based TAB, mostly to bridge expenses to weather the crisis.

But a lot of the relief — up to $349 billion — promises to come through the “Paycheck Protection Program,” a special Small Business Administration loan created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Small businesses can access PPP loans through existing SBA lenders and other participating financial institutions effective April 3; independent contractors and self-employed people can take advantage of the program beginning April 10. The terms are the same for all borrowers — two-year terms at 0.5% interest — and loan payments are deferred for six months. Use of the loans are restricted to payroll costs, including benefits; rent or interest on mortgage obligations; and utilities. The U.S. Treasury has supplied an information sheet for borrowers. (In a late press conference on April 2, Treasury Secretary Steve Mnuchin announced the interest rate on these loans would be raised, to a still-low 1%. The SBA then released an interim final rule with more information.)

Demand promises to be strong for these new SBA loans — many small businesses need cash now. But implementation is proving to be a challenge, and there’s a limited amount of time for small businesses to apply; June 30 is the deadline for the PPP loans. Additionally, there’s concern that the $349 billion in available funds won’t be enough.

At $239 million Farmers State Bank, Small Business Lending President Chris Healy has put in long hours to stay abreast of these changes and get information out to the small businesses in his markets, using email marketing, the bank’s website and videos on its social media channels.

The bank, based in Alto Pass, Illinois, is already an SBA lender and is familiar with the intricacies of the agency’s process. It has also shifted its technology to prioritize these new loans. The process has been iterative, with Healy uploading and sharing new requirements with customers as information provided by the SBA and Treasury evolves. The entire process is digital; Farmers was able to pivot quickly because it already had the technology in place.

Healy tells me roughly 300 small business customers started applications before April 3. That’s 12 times the volume in a normal year — the bank typically closes around 25 SBA loans. However, some worry the industry won’t be able to meet this influx of demand.

In a statement released April 2, the Independent Community Bankers of America cited key barriers for financial institutions. The low interest rate means banks won’t be able to break even on the loans, the two-year terms are incredibly short, and the guidelines are restrictive.

The low interest rate and abbreviated term could limit the availability of these loans, said Chris Hurn, the CEO of Lake Mary, Florida-based Fountainhead Commercial Capital, a nonbank commercial lender, in a recent webinar. Secondary markets won’t be interested in purchasing the loans. The U.S. Treasury has indicated it will purchase them, but a mechanism for doing so hasn’t been made clear.

“We’re still awaiting the final rules of how to do this, but being an experienced SBA lender already, we’re familiar with following their intricate procedures and guidelines and so forth, and this is going to be a significantly stripped-down version of that,” Healy says. However, “the Treasury did shock us … with laying out the terms on the two-year basis and a 0.5% interest [rate].”

A key provision for small businesses is that these loans can be forgiven under certain conditions: if the proceeds are used as required, and employee and compensation levels are maintained over the eight-week period after the loan is made. The intent is to ensure Americans still have jobs after nearly 10 million have filed for unemployment in the past two weeks alone. (Small businesses employ 47% of working Americans, according to the SBA.)

However, guidance is needed on the documentation and calculations that will be required to determine loan forgiveness, said Hurn.

But without the new SBA program, Healy says Farmers wouldn’t be able to support small businesses to the degree necessitated by the crisis. He expects the government to ultimately buy these loans back. “If we do a $5 million loan to help a small business, that’s a big loan for us but we can sell it back to SBA immediately, and they’ll buy it from us at the principal value of the loan,” says Healy.

Small businesses need relief. Long after this crisis has passed, those that survive will remember how banks helped them through it.

A Community Bank’s Pursuit of Coast-to-Coast SBA Lending

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lending-7-11-18.pngTraditional processes for underwriting and originating small business loans can be expensive and onerous for the typical financial institution, making it difficult to make these loans profitable. But Stuart, Florida-based Seacoast National Bank—through its partnership with SmartBiz, based in San Francisco—is already experiencing significant growth in SBA loan volume by automating the process and accessing a nationwide pool of prospective customers. In fact, the $5.9 billion asset bank plans to crack the Small Business Administration’s list of the top 100 SBA lenders by the end of this year.

It’s hard to argue with the results so far: Data from the SBA reveals the bank’s average number of loan approvals for 2018—43 per quarter as of June 22—are almost equal to the total number of SBA loans the bank approved (46) in all of 2017. Of the 129 SBA loans approved by Seacoast so far this year, almost 100 were generated through SmartBiz, according to the bank. SBA loan volume is at $33.9 million so far for the year—more than double the amount approved by the bank last year.

Seacoast started working with SmartBiz about a year ago, due to its interest in the fintech firm’s ability to provide access to a broad, national base of potential customers, says Julie Kleffel, executive vice president and community banking executive at Seacoast.

Eight banks currently participate in SmartBiz’s loan marketplace. Each bank outlines its credit policies and desired customer criteria with SmartBiz, which allows it to serve as a matchmaker of sorts between customer and lender. “We’re able to send the right borrowers to the right bank,” says SmartBiz CEO Evan Singer. Roughly 90 percent of the customers matched to the company’s partner banks are ultimately approved and funded, which benefits both the customer and the bank, which is less likely to waste time and resources underwriting a loan that it ultimately won’t approve.

Seacoast’s underwriters have the final say on whether the loan is approved, and they close the loan, says Kleffel. The guaranteed portion of the loan is sold on the secondary market, with Seacoast keeping the unguaranteed portion. (Under the SBA 7(a) loan program, the SBA pays off the federally guaranteed portion if the loan defaults.)

Kleffel says the two entities have a “collaborative” relationship and spent time early on learning how the other does business. Together, “we provided a way to better serve both our existing clients as well as new clients [SmartBiz is] introducing us to,” she says.

Seacoast currently ranks 108th on the SBA’s list of top lenders, putting the top 100 within sight. Access to more customers through SmartBiz has contributed to the bank’s SBA loan growth, but a more efficient process means the bank can handle the increased volume. The traditional 30- to 45-day process has been cut to 11 or 12 days, according to Kleffel. Ultimately, the bank would like to approve SBA loans within 10 days of submission.

Singer credits Seacoast for making the most of the partnership. “The leadership at the bank has really embraced innovation, and you can see what they’re doing out in the marketplace to meet customer needs,” he says, adding that the experienced SBA team the bank has in place is another key differentiator.

Seacoast aims to treat these new customers just as well as the customers it would attract more traditionally through its Florida branches. Each new customer receives a call from a Seacoast banker, introducing them to the bank. The same banker “works directly with them all the way through closing and post-closing, so that they’re appropriately brought into the Seacoast family with the same level of care” as any other customer, says Kleffel, with an eye to retaining and growing the relationship.

Seacoast has accomplished this growth without hiring new staff. SBA loan origination is currently supported by just five employees, including a department manager. Supporting that level of loan volume and growth would require double that without SmartBiz on board. The partnership, Kleffel says, “has allowed us to pull through more revenue, faster, with [fewer] people and a better customer experience.”

Ten Reasons for Banks to Focus on SBA Lending

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lending-12-15-17.pngLending teams are often unable to underwrite loans that don’t fit within the bank’s commercial lending policy, but many of these loans could be done as Small Business Administration loans. For example, 10-year equipment financing is an option with the SBA program, but most banks only provide terms of up to 5 years. Providing low risk alternative financing structures for borrowers can increase profits for the bank.

Banks can quickly begin an SBA lending operation by outsourcing through a lender service provider. This ensures that the bank’s SBA loans are done correctly. Fees are only incurred when the loans close, and the bank is making money.

As chief executives and their management teams consider how to increase the bank’s profitability in the coming year, here are 10 reasons to include SBA lending as a tool for success.

  1. A small SBA lending department underwriting $8 million to $10 million in loans annually can expect to generate $600,000 to $750,000 per year in pretax income.
  2. The SBA guaranty can mitigate the bank’s risk on any loan, but especially on under-secured loans. The SBA will cover 75 percent of the loss if there is a default on the loan.
  3. For smaller banks, the SBA guaranty program expands the legal lending limit, since only the unguaranteed portion of an SBA loan is counted against a bank’s lending limit. Given the SBA’s 75 percent guaranty on loans, a bank with a $1 million legal limit could underwrite a $4 million SBA loan.v
  4. SBA loans can help a bank improve its activities under the Community Reinvestment Act (CRA) by reducing risk, and providing small businesses with longer terms and enhanced cash flow.
  5. The SBA allows banks to refinance existing loans in their portfolios. This can help the institution to restructure its loans with longer terms, manage loan concentrations and reduce risk.v
  6. SBA loans typically have a variable rate and provide the bank with a higher yield than a conventional loan. Given this, creating an SBA portfolio can help improve a bank’s interest yield on its portfolio.
  7. Capital and loan loss reserve requirements are lower on SBA loans.
  8. A bank can grow its portfolio more rapidly through SBA lending.
  9. Guarantees on SBA loans increase liquidity for the bank.
  10. SBA loans produce more fee income.

To illustrate these benefits, let’s consider the following example. A $300 million asset bank earns $2.4 million in net income annually, a 0.8 percent return on assets (ROA). If the bank starts an SBA department the next year, funds $10 million in SBA loans and then sells the guarantees, the bank will likely earn an additional $600,000 in after-tax income. That additional income will push the bank to the 1 percent ROA level. If the same bank has 3 million shares of stock outstanding, the increased earnings will likely move the stock price from $8 to $10 a share, assuming a price to earnings (P/E) ratio of 10. This improvement in financial performance will reflect positively on management, and the SBA loan portfolio only increases by $2.5 million, or one-quarter of SBA loans that are not guaranteed.

All bankers come across loans they would like to fund, but can’t, or loans they are confident are good loans but don’t quite fit into the bank’s commercial lending policy. We have seen many banks utilize SBA lending to provide better financing terms to their clients, mitigate risk and make these loans bankable. The result is more satisfied clients and higher profits.

The Breakdown of What SBA Lending Can Do For Your Bank

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sba-lending-6-29-16.pngIn today’s challenging banking market, community banks are always looking for ways to increase profits, minimize expenses and diversify their loan portfolios. One solution many banks are utilizing is to add an SBA lending department into their mix of loan products.

The primary SBA lending program is the SBA 7(a) loan program, which allows the bank to make small business loans and receive a 75 percent guarantee from the U.S. government. The guaranteed portions of these loans can be sold in a secondary market, with current gain on sale premiums of 13.5 percent net to the bank.

SBA lending is not only a great way to increase the number of business clients that your bank can serve, but can also be very profitable.

Profitability Model
Let’s assume that you hire your underwriting and processing staff and the lending staff brings in $10 million in SBA loans. If the bank sells the 75 percent portion of the loans that is guaranteed, or $7.5 million, it should earn at least a 12 percent premium in today’s market, or $900,000. For simplicity sake, we will exclude interest and servicing income from this analysis. If you can generate the $10 million with an internal lending staff, the bank will generally have the $200,000 processing and underwriting expense, and therefore generate $700,000 in profit.

Impact on Stock Price
Let’s say your bank currently makes $1.5 million per year in income from its current activities and has 3 million shares outstanding, or an earnings per share (EPS) of 50 cents. At a typical price/earnings ratio of 10, the bank’s stock should be trading at around $10 per share. If the bank were to create an SBA department and generate the additional $700,000 in pre-tax profits, the after tax affect would be an increase in income of $455,000 or $1.96 million in total profit. This would boost the banks EPS to 65 cents and should move the stock price up to $6.50, which will certainly make your board and shareholders happy.

Other Benefits of SBA Lending
Beyond enhancing profitability and mitigating risk, many banks use SBA lending as a tool to provide better loan structuring for their loan clients. So what are some common ways to utilize the SBA 7(a) guaranty?

Some loans may be better suited to being structured as SBA loans and they may be eligible for refinancing. Converting existing conventional loans or lines of credit by refinancing them into SBA guaranteed loans is one way to improve your portfolio and generate fee income. Banks are allowed to refinance their own debt, but it is important to note that the loan needs to have stayed current within 30 days for the last 36 months. If not, SBA would consider the lender to be putting itself in a preferential position.

We recently had a client refinance a mini-storage loan they had on their books that was coming up for renewal. Their regulator had criticized the bank for having a concentration in mini-storage loans. We completed the refinance of this mini-storage loan for approximately $1.6 million and sold the $1.2 million guaranteed portion for a premium in excess of $133,000.

Many times banks have good clients that need financing for equipment the bank doesn’t feel comfortable relying on as collateral. Some examples of this might be food processing and bottling equipment, car washes, MRI machines or unique manufacturing equipment. However, the SBA guaranty can mitigate the risk of taking unique assets as a form of collateral.

Smaller banks can also use the SBA 7(a) guaranty program as a way to provide funding beyond their legal lending limit. Since the guaranteed portion of an SBA loan is excluded from calculating this limit, it frees up the ability to make more loans to a quality customer.

Conclusion
It is clear that creating an SBA lending group can increase your bank’s profitability and provides some significant advantages. All community banks are looking for new ways to better serve their clients and increase profits. SBA lending provides an opportunity to accomplish both of those objectives and potentially improve the bank’s stock price at the same time.

The Top SBA Lenders Fuel Small Business

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SBA-loans-4-8-16.pngCalvin Coolidge once observed that “the business of America is business,” and if the 30th president of the United States were alive today, he would probably amend his statement to says “the business of America is small business.”

Indeed, small businesses—or companies with fewer than 500 employees—are the engine of the U.S. economy, accounting for 99.7 percent of all U.S. employee firms, 64 percent of net new private sector jobs and 49 percent of private company employment, according the the Small Business Administration’s Office of Advocacy. However, banking a small business can be an entirely different matter because as borrowers, they tend to fall into a high risk category. Only about half of all new businesses are still around after five years, according to the SBA, and only about a third survive 10 years or more. Most banks tend to be put off by markets where the likelihood of success or failure could be predicted by the flip of the coin.

Enter the SBA’s various loan guarantee programs, particularly its highly popular 7(a) program (named after a section of the Small Business Act passed by Congress in July 1953), which has been very successful in bringing much needed bank financing to the small business sector. In its 2015 fiscal year, which ran through September 30, the SBA approved 63,000 7(a) loans for a record $23.6 billion. In FY2014, the SBA approved 52,044 7(a) loans totaling $19.19 billion. While the 7(a) program’s annual loan totals are still well off their peak in 2007, when they approached 100,000, volume has been increasing since 2009, when demand dropped off sharply as the financial crisis and Great Recession caused many banks to pull back from most lending markets.

There are several SBA loan guarantee programs, including disaster recovery loans, microloans and financing loans for fixed assets like real estate and equipment. But the 7(a) program is the big daddy of them all, and can be used for a variety of purposes, including acquisitions, business expansion, working capital and debt refinancing. A regular 7(a) loan can be for as much as $5 million. Loans up to $150,000 can be guaranteed by the government up to 85 percent. For loans over $150,000, the guarantee limit is 75 percent. These are term loans with one monthly payment of principal and interest, with a maximum maturity of 10 years except for real estate. Real estate can be financed for a maximum term of 25 years.

The leading SBA 7(a) lender in FY2015 based on loan volume was San Francisco-based Wells Fargo & Co., which originated $1.9 billion in loans, followed by Live Oak Banking Co., U.S. Bancorp, JPMorgan Chase & Co. and Huntington Bancshares. Wells Fargo also originated the greatest number of loans in FY2015, at 7,254, followed somewhat surprisingly by Huntington, at 4,337. Wells Fargo—which is the third largest bank in the country with $1.78 trillion in assets—sources much of its 7(a) loan production through a coast-to-coast retail branch network, while $71 billion asset Huntington relies on a much smaller network of 750 branches in six upper Midwestern states, with additional loan production offices in Chicago, Wisconsin and Florida.

Top SBA Lenders in FY 2015
Lender State Approved Loans Approved Amount*
Wells Fargo & Co. CA 7,254 $1,918
Live Oak Banking Co. NC 966 $1,148
U.S. Bancorp MN 3,977 $776
JPMorgan Chase & Co. NY 4,040 $754
Huntington Bancshares OH 4,337 $673
Celtic Bank Corp. UT 1,586 $499
Ridgestone Bank WI 475 $474
SunTrust Banks GA 575 $365
Newtek Small Business Finance NY 391 $356
Seacoast Commerce Banc Holdings CA 325 $293
BBVA Compass AL 1,432 $269
Regions Financial Corp. AL 329 $247
BBCN Bank CA 315 $240
BankUnited Inc. FL 169 $207
Stearns Financial Services MN 490 $205

*Dollar amounts are in millions
Source: Small Business Administration

The top five 7(a) lenders in FY2015 carried their rankings through the first quarter of the SBA’s 2016 fiscal year as well, which ended December 31. Wells Fargo lead the group with 2,379 loans for total volume of $437 million.

Huntington SBA Group Manager Margaret Ference is a big proponent of the agency’s various loan guaranty initiatives, particularly the 7(a) program. “It allows us to invest in our communities and say yes” to small business borrowers who otherwise might be deemed too risky for a conventional commercial loan, she says. Whether the problem is a collateral shortfall, too much leverage or the need for a longer loan term than Huntington would normally provide, the SBA’s backing makes it possible for many small business borrowers to qualify for bank funding who probably wouldn’t be approved for a conventional business loan. “The SBA guaranty is used to mitigate risk, not to make a risky loan,” Ference says.

The 7(a) program is in fact Huntington’s primary small business loan, and the bank views it as an entry level product. The ultimate goal is to engage the borrower in a broader relationship that would include commercial deposit accounts, merchant services and cash management services. “That’s the start of a relationship,” she says.

How to Safely Generate Bank Income Through SBA Loans

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sba-loans-8-19-15.pngSmall Business Administration (SBA) lending is one of the key lending activities that can quickly and dramatically improve the bottom line of a community bank. It is not that difficult for a bank to generate $20 million in SBA loans, which will earn the institution between $1.0 to $1.2 million in pretax net income, if the loan guarantees are sold. Some bankers get concerned because they have heard stories of the SBA denying loan guarantees and that the SBA loan process is too time consuming and complex.

Sourcing SBA Loans
The basic strategies that most successful SBA lenders use to source SBA loans are as follows:

  1. Hire an experienced SBA Business Development Officer (BDO), who can find loans that fit your credit parameters and geography.
  2. Source loans from brokers or businesses that specialize in finding SBA loans.
  3. Utilize a call center to target SBA borrowers.
  4. Train your existing staff to identify and market to SBA loan prospects.

I have put these in the order of which approach is likely to be the most successful. However, ultimately it is the speed of execution that enables one lender to beat out another in the SBA business. So if you want to hire that high producing SBA BDO, the bank needs to have a clear idea of the types of credits that they will approve and a process that can quickly get them approved.

This can create a catch 22 for the lender, since in order to justify hiring SBA underwriters and processing personnel, you have to make sure that you generate loans. But in order to recruit those top performing SBA BDOs, you will need to show them that you have a way of getting their loans closed quickly.

The most effective solution for solving these problems is to hire a quality SBA Lender Service Provider (LSP).  This is the quickest way to add an experienced SBA back shop that will warranty its work and handle the loan eligibility determination, underwriting, processing, closing, loan sale and servicing. This gives the bank a variable cost solution, and allows them to have personnel to process 100s of loans per year. While some of the better LSPs will help the lender with the underwriting of the loan, it is solely the bank that makes the credit approval decision. SBA outsourcing is very cost effective and allows a bank to begin participating and making money with these programs immediately, even if they only do a few loans.

Making a Profit
Let us look at the bank’s profits from a $1.0 million SBA 7(a) loan that is priced at prime plus 2.0 percent with a 25-year term.

Loan amount $1,000,000  
Guaranteed portion $ 750,000  
Unguaranteed portion $ 250,000  
Gain on the sale of the SBA guaranteed portion $ 90,000 (12% net 14% gross)
Net interest income(5.25%-0.75% COF = 4.5%) $ 11,250 (NII on $250,000)
Servicing Income ($750,000 X 1.0%) $ 7,500  
Total gross income $ 108,750  
     
Loan acquisition cost (assumed to be 2.5%) $25,000 (BDO comp, etc.)
Outsource cost (approximately 2.0%) $ 20,000 (per SBA guidelines)
Annual servicing cost (assumed to be 0.50%) $ 5,000  
Loan loss provision (2.0% of $250,000) $ 5,000  
Total expenses $ 55,000  
Net pretax income $ 53,750  
ROE ($53,750/$25,000 risk based capital) 215%  
ROA ($53,750/$250,000) 21.5%  

In this example the bank made a $1.0 million SBA loan and sold the $750,000 guaranteed piece and made a $90,000 gain on sale. The bank earned $11,250 of net interest income on the $250,000 unguaranteed piece of that loan that the bank retained. When an SBA guaranty is sold, the investor buys it at a 1.0 percent discount, so the lender earns a 1.0 percent  ongoing fee on the guaranteed piece of the loan for the life of the loan. This example  did not account for the amortization of the loan through the year.

I believe that the expenses are self explanatory, but you can see if the bank made $20 million of SBA loans using these assumptions, they would earn $1.075 million in the first year.

Conclusion
As you can see, SBA lending can add a substantial additional income stream to your bank; however, you need a certain amount of loan production and a high quality staff, or you need an SBA outsource solution to underwrite and process the loans. As you can see, the ROE and ROA for SBA loans is much higher than conventional financing, which is why you see community banks that have an SBA focus generate higher returns.

How Banks Can Profit from SBA Lending

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4-7-14-SBA.pngAll community banks are looking for ways to leverage their staff, maximize profit, minimize expense and build flexibility into their loan portfolios.

One effective way to do this is to participate in SBA lending and to use an SBA outsource provider to provide your bank with a simple and cost effective way to offer this product.

The primary SBA lending program, the SBA 7(a) guaranty loan, allows the bank to make small business loans and receive a 75 percent guarantee from the U.S. government. The guaranteed portions of these loans can be sold in the secondary market, with current gain on sale premiums of 13.5 percent net to the bank. So if a bank makes a $1 million SBA loan and sells the $750,000 guaranteed portion, it will generate a premium or fee income of $101,250.

In addition, when the guaranteed portion of an SBA loan is sold, the investor buys the guaranty at a rate that is 1 percent less than the note rate. In this example, if you have a $1 million SBA loan at an interest rate of 6 percent and the bank sells the $750,000 guaranteed piece, the investor buys it at a 1 percent discount off the note rate and receives a yield of 5 percent. This means that the bank will earn 6 percent on the $250,000 portion that they retained and 1 percent on the $750,000 or $7,500 per year, not accounting for amortization of the loan. If you compare that $7,500 per year in servicing income to the $250,000 that the bank retains on its books, you can see that it represents an additional 3 percent yield on the retained portion. That 3 percent of servicing, plus the note rate of 6 percent, shows that the bank’s gross yield on the retained portion of the loan is now 9 percent. This additional yield is something to consider if your bank is competing for a loan with a larger bank that is trying to undercut your bank on pricing. The added servicing income will enable you to maintain your yield even on loans that have lower pricing.

While SBA lending can be very profitable, it should be viewed as more than just a profit center for your bank.

The SBA loan guarantee can be used to refinance existing loans to mitigate risk in your loan portfolio or to help retain clients who are close to the bank’s legal lending limits. Using SBA lending to refinance existing bank loans can be helpful in reducing real estate concentrations since properties like hotels, mini storage facilities and care facilities are included as investment properties by regulators. If a bank has these types of properties on their books, they can often refinance the loan and sell the guaranteed portion to reduce a concentration and free up capital. Using the SBA guaranty to make loans that fall into an investment property category is a good way of managing portfolio concentrations.

Why does SBA outsourcing make sense?
Outsourcing your SBA lending department eliminates the need to allocate resources and budget for an SBA department since there are no upfront or overhead costs associated with it. Outsourcing eliminates the risk of hiring an SBA team and then not generating sufficient loan volume to support the cost of that staff. SBA personnel costs are high, and it can be difficult to find qualified people. Also, without an experienced and dedicated SBA group, your loan officers will typically avoid handling SBA loan applications for fear of dealing with the complex SBA rules and process.

Outsourcing also enables a community bank to acquire, through the outsource provider, an experienced staff, which in turn enables it to provide an accurate and efficient process to its SBA borrowers. An SBA outsource provider can efficiently process, document, close, sell to the secondary market and service your loans. Typically these services charge between 0.6 percent to 2 percent of the loan amount.

Conclusion
In today’s competitive market, the SBA program offers too many profit enhancement and risk mitigation opportunities to simply ignore its value. In order to maximize success, bankers need to have every tool available to them.

What’s Wrong with the Sales Process at Banks?

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3-7-14-Ignite-Sales.pngRetail banking is at an inflection point.

Together with the obvious pressures from regulations and low interest rates, non-financial institutions such as PayPal and Walmart are threatening banks’ bottom lines. They are under attack in areas they have felt most secure, such as business banking. Walmart’s Sam’s Clubs are offering Small Business Administration (SBA) loans and PayPal has hired a lending team under an executive vice president of business banking. At the same time, customers are also taking greater control of their banking relationships: They are switching banks, changing their behavior and demanding improvements.

Banks need to reestablish their relationships with their current customers and evolve their consultative sales process to be consistent and repeatable throughout all their channels. They need to adopt best practices in sales found in other retail industries, as well as measure results. They also need to embrace technology to survive and remain competitive.

All banking channels, including mobile, branch, and online, are struggling with sales productivity and performance. These reasons include:

Loss of fee income: Ninety-five percent of non-interest, fee generating products are opened in the branch. Due to increased regulation, banks have seen a decline in revenue from these products and need to find ways to recoup fee income that was generated prior to regulation.

Too many expense centers: Banks are facing many challenges managing profitability across their branch network, which happens to be their biggest expense. They haven’t had the insight they needed to determine potential profits from their branch network.

Sales process has not been a priority: Banks have paid little attention to the sales process, and therefore, the buying process. Banking has never had to focus on a comprehensive sales process. Because of healthy margins from loans and fees, banks have historically shied away from proven sales methods found in other industries. However, now that the market has become competitive, the lack of sales infrastructure hurts. More progressive banks have begun to hire experienced sales management from other industries that bring the expertise needed to change this culture.

Making decisions on intuition, not real data: Most banks don’t have methods in place to capture data at the point-of-sale. As a result, management is unable to accurately track what is sold, or determine whether the revenue in each channel or branch is generating fee income or interest income. They have no real data that shows which channels are profitable, and which need coaching or even closing.

Fear of technology: Technology has rapidly evolved over the past several years. It is challenging to keep pace with the rate of change. Banking’s internal culture is slow to accept these changes, giving non-traditional competitors a window to use technology to capture market share from traditional banks.

Tackling each one of these issues is a formidable challenge on its own. Collectively, they become a board level issue. Banks that do not address these issues will continue to struggle or will not be able to remain independent.

The first step is to close the gap between the buying process and the sales process. To do this, banks need to:

  1. Put successful and repeatable sales processes in place to ensure that the bank is opening profitable accounts and to ensure a consistent customer experience;
  2. Collect data at the point of sale to be able to measure productivity and profitability in real-time, so that the bank can adjust to changing market conditions;
  3. Be agile enough to embrace technologies quickly to remain competitive.

Banks that take the first steps in modernizing the sales process and embracing technology will be well on their way to compete in the new age.