SBA Lending May Be Critical to Future Community Banking

by Spilman Thomas & Battle, PLLC

Headlines should read, “Congress and President Do Something Right!” On July 28, 2015, only one day after Congress passed the matter, the President signed into law an increase in Small Business Administration (“SBA”) lending, from $18.75 billion to $23.50 billion, for the 7(a) program. One common SBA lending program, 504, was not restricted, so loans for buying and developing real estate continued. The 504 program seems to be less useful to many banks than the 7(a) program, at least in recent years. The 7(a) program, which finances the purchase and development of companies, including loans to develop business property and upgrade equipment, was restricted and frozen since reaching the limit earlier in July. That is a critical program, particularly for the many retiring Baby Boomers looking to sell companies to third parties or employees.
The American Banker featured a number of recent articles on banks that use technology and new techniques to offer commercial lending to clients. All banks can improve commercial lending by using the SBA, because it solves a lot of problems. Historically, SBA lending was difficult, slow, and involved a large amount of what we call “administrivia.” Some banks used it as a last resort, when they could not offer the loan any other way. Some large regional banks, recognizing the benefits, trained lenders who specialized in SBA lending. SunTrust and BB&T mid-atlantic region for example, have specially trained lenders who are proficient at SBA lending. Many community banks avoided the SBA. Things have changed. The SBA made huge efforts to streamline the SBA lending process. The loans still take longer than purely “local” loans, but one can often complete an SBA loan in a few weeks. The SBA also made the qualifications both broader and much easier to follow. They upgraded their technology substantially, so virtually all the application process is online. What we hear from banks that offer these loans is that when they email or call the SBA, someone at the SBA usually responds. In short, as much as we complain about government, the SBA seems to be an agency that does want to help.
Why use the SBA? Many think that non-SBA lending is broken. While bank lending to small businesses has decreased only 10 percent since 2008, it is on a long downward trend. Today, these loans comprise less than 30 percent of total loans, compared to almost 50 percent of bank loans in the 1980s. An excellent article on this was recently published by The American Banker. High costs, greater risk, and stricter regulatory supervision all contribute to the decline in small business lending. SBA lending helps with at least two of those. It lowers the risk, because the SBA is responsible for up to 85 percent of a loss. A bank can make a loan with 100 percent of the reasonable interest payments and only one-quarter or less of the risk exposure. It helps with supervision, because less capital is needed to support the loan (due to the SBA guarantee). This allows banks to make loans that they otherwise might not make. It is not “free money.” Administration still is more complicated, but not as much as you may think. Underwriting standards often mirror the bank’s own list. Also, the SBA checklist may be different from one’s bank, and one needs to satisfy those. One may be surprised how often a loan fits one’s requirements.
We recently did a transaction that allowed two young managers buy their company-employer from the founder. They were minority shareholders with no control. It is a special industry, not particularly suited to the equity markets, but a business with somewhat consistent demand in any economy for the foreseeable future. It is not a business that is easily scalable (expensive equipment needed), but it will continue to grow. The founder was past retirement age, he wanted his money upfront, and the buyers were young with very little personal capital, outside of the business itself. The bank wanted to make the loan, but, while it did business for the company, it did not know the buyers. Most of the business equipment was in good shape, but old, so asset values were not 100 percent of the loan amount. The SBA guaranteed the loan, the transaction went forward, and a year later the company is thriving under new, energetic management.
The SBA provides online training and occasionally in-person training around the country. If one makes a couple of these loans under either 7(a) or 504 (the procedures are a bit different), keep good notes, and this becomes easier. As we said above, the SBA actually seems to try to help. If small business loans still gives one a queasy stomach, or one wants to leverage small business lending, the SBA may help one do just that.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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