SBA Financing In 2010
SBA financing, like all sectors in the industry, have seen a difficult year. No one did or could have predicted what actually happened. The Stimulus Package administered by the government, a welcomed surprise by most in the business, has for the most part been a relative success. Some would say that it likely saved the program from the brink. It has kept SBA Business Loans viable (compared to other commercial mortgage programs that are now dead and gone) as well as motivated borrowers to use the program due to the reduced SBA financing fees.
Though this is not to sugar coat reality. The number of closed SBA 7a Loans in 2007 was 99,606, in 2008 was 69,434 and for year end 2009 it was 44,209 (Their fiscal year end is 9/30). Volume was $14 billion, $12 billion and $9 billion, respectively… (We are saying a relative success here).
As mentioned above the reduced SBA fees due to the Stimulus package have been a motivating factor for borrowers to use the program. For example, the SBA fees on 7a loans were structured on a sliding scale based on the loan amount. The range was from 2% – 3.75% of the guaranteed portion of the loan, which was 75% of the loan amount. So on a loan of $1,000,000 loan, the guaranteed portion would be $750,000. The fee would have been approximately $22,500 (3% x $750,000). It’s a significant amount of money for most small business owners that are struggling to keep their liquidity and or equity in their property.
Benefits for the Banks
For banks and SBA Lenders it did two positive things as well – it increased the guaranteed portion of the loan amount from 75% to 90% (again on SBA 7a loans) which encouraged banks to lend again and take on more risk. Secondly, it has helped free up the SBA secondary market by purchasing approximately $15 billion of “frozen” debt that was clogging this market. This is a very important point.
Most banks do not hold onto the loans that they fund. They normally sell the loans off onto the secondary market for a premium. During the height of the crisis, in January/February of 2009, the premiums were down to 2%, from 12% just a few months prior… This is one of the major reasons why volume dropped so much. The only banks and lenders that were lending had the ability to hold onto the funded loans on their balance sheets.
Most banks did not want to do this or could not do this for a variety of reasons, such as their own liquidity issues. They needed to be able to immediately turn around and sell the loan off for a quick profit on the secondary market. Because premiums were so down, many banks did nothing and waited until the market normalized.
Premiums as of this writing are back up to approximately 85% – 90% of where they were before this crisis started. SBA 7a loans are being sold for a 9% and 10% spread. This is perhaps the biggest success of the Stimulus Package.
SBA Financing – Where are we going?
Where do we go from here? There are a couple of interesting dynamics in play. One is what happens when the Stimulus Package runs out, which is now estimated to occur in November of 2009? Will it be re administered, like some predict? If not, the SBA fees will be put back into place and the guaranteed portion will likely drop back down.
Will this slow borrowers and banks appetite for the program? Probably, but what other options will borrowers have and for how long can healthy banks go without doing deals?
Conventional owner occupied loan requests, that do not fit the SBA underwriting box also face similar issues. Try getting an 80% loan to value refinance done, without the SBA guarantee for example. It is not going to happen.
Bottom line, for most owner occupied borrowers, SBA financing will remain one of the most reliable and cost effective financing available in the market for the next year or so. And this is regardless if the SBA fees are put back into place. If the conventional secondary market is repaired then things will surely re open and borrowers and us lowly commercial mortgage brokers will have more loan programs to work with.
Who Qualifies?
For commercial mortgage brokers the main key is for your clients business to occupy a minimum of 51% of the building being purchased or refinanced. Much of the previous restriction from the SBA have been waived or reduced, so the majority of businesses qualify. The difficult thing is convincing the lender or bank that the borrower is credit worthy.
All the typical ratios are used to determine this, such as Debt Coverage Ratio, Loan to Value, Liquidity, Global Cash Flow (this is just where they include personal expenses into the analysis), etc. Trends of the business are now more important than ever. Bank loan officers want to hear how the business is doing in this economy immediately.
For example if the business your working with grossed $2,000,000 in sales in 2006, $1,700,000 in 2007, and $1,500,000 in 2008 you will likely have a difficult time getting that loan closed, even if the rest of the file is strong, such as good liquidity and year to date is back up. Most banks will likely just “pass.”
To get SBA loans closed you need to work with hungry banks and strong borrowers.
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