SBA 7A loan program
In part I of the video series on niche lending strategies for financial institutions planning to shift their loan portfolios from commercial real estate to commercial and industrial loans, we discussed accounts receivable factoring and how that is one way to achieve higher profitability. Today, we discuss how banks can take advantage of the SBA 7(a) loans.
To see the full recorded webinar, visit The New Normal: How to Achieve Profitable C&I Loan Growth in Today’s Economy.
SBA (7a) Loans is the SBA’s primary program for helping start-up and existing small businesses. It is designed to finance businesses that would not otherwise qualify for bank financing, and it offers a 75 percent Federal Government guaranty. The loan volume in this proSgram, both in terms of number of 7(a) loans approved and outstanding, has grown significantly over the last few years.
Key benefits to the bank:
- Reduce loan portfolio risk, while increasing profitability.
- Reduce risk: 75 percent guarantee of the outstanding loan balance by the U.S. Federal Government.
- Increase profitability: The guaranteed portion of an SBA loan (75 percent) can be sold into an active secondary market at a substantial premium.
- Improve capital ratios. Bank only needs to pledge reserves against the unguaranteed portion of the loan (25%).
- Increase eligible loan size. Only the unguaranteed portion of the loan (25 percent) needs to be counted against the bank’s legal lending limit to one borrower rule.
- Reduce concentration exposure and/or exposure to stressed C&I credits. Existing C&I loans that meet certain criteria can be refinanced, and the 75 percent guaranteed portion can be sold at a substantial premium, regardless of collateral coverage.
Key benefits to the borrower:
- Longer terms with lower payments.
- Fully amortizing: no calls or balloons.
- Full collateral coverage is not required.
- Lower equity contributions.
- No prepayment penalty for loans with a maturity of less than 15 years.
The maximum loan size under the 7(a) loan program is $5 million. The business must be a legal, for-profit entity based in the U.S. The business must have an income of less than $3.5 million and a net worth less than $15 million. Commercial real estate must be 51 percent owner occupied (60 percent for new construction). Principals of the business must be judged to be of “good character” and legal U.S. citizens or residents.
To learn more about the risks involved with changing credit concentrations, download the whitepaper titled: Shifting Credit Concentrations: 6 Ways to Prepare.