This post is part two of a four-part series on developing an SBA lending strategy.
In our last post we established the Three P’s of developing an SBA lending strategy as Plan, People, and Process. In today’s post we will take a deeper dive into the first “P,” which is developing your SBA lending plan. A written SBA lending plan is not only a sound approach to establishing an SBA lending program, it is also required by the SBA’s Office of Credit Risk Management (OCRM). It serves as a roadmap that documents how you will implement SBA lending at your financial institution. It is a living, breathing document that will evolve as your program evolves, and so must be updated at least every three years. Its main purpose is to outline the core elements of your program and how you will market and deliver your SBA loans.
Elements of an SBA Lending Plan
Your SBA Lending Plan must address the following items.
As with any business endeavor, you need to establish a clear budget with projections. The budget needs to include startup costs and ongoing expenses along with revenue projections. As always, pair projections with written assumptions and any supporting data and documentation. You determine success. Whether it is 6 loans per year or 60, you need to come to terms with what you believe will be your realistic goals.
SBA Credit Policy and Compliance Measures
Your plan must include a written policy statement that outlines how you will meet and maintain compliance with SBA requirements. This includes creating a Compliance Officer position, which will be the primary party responsible for overseeing and ensuring compliance throughout every stage of the lending process. A balance between business development and credit risk management and compliance is always the best path.
Define Your Risk Profile
One of the main benefits of the SBA 7(a) program to lenders is that it can help mitigate the Five C’s of Credit. However, many lenders get in trouble for allowing loans to borrowers who lack capacity or who have poor credit scores, as well as for not properly valuing goodwill in acquisitions. This is because these lenders don’t know how much risk to take and don’t develop and communicate a set list of criteria to each individual responsible for making lending decisions. It’s important to firmly establish your credit criteria and to develop a matrix that can be referenced by your team for every deal. The SBA industry is a small one and there are a lot of sources for information to assist your organization in managing risk. The National Association of Government Guaranty Lenders (NAGGL), the various SBA District Offices, and peer groups are all good sources that allow you to gradually expand your credit criteria.
Methods of Growth
Your plan should identify whether you will market and grow your program through organic means via your existing branch network, or if you will leverage agents and brokers to locate and secure SBA loans. For banks and credit unions with multiple branches, adding SBA lending lets you quickly expand relationships with existing clients. If you don’t have a strong client base or physical presence, or you don’t have in-house BDOs to develop business, brokers can help you secure loans in exchange for referral fees. Brokers let you grow your SBA lending faster, but it can be a riskier approach. You will need to weigh the options and determine what is best for your institution. If you elect to utilize brokers, you must have an internal due diligence policy and broker agreements in place. Don’t forget the SBA Form 159 either!
As part of your plan you will also need to decide whether or not your institution will sell in the secondary market. Selling loans makes it more difficult to facilitate workouts because you need approval from the SBA and you need to price your loans in a way that will allow you to maximize the premium, which is a variable of prime plus 2.5 to 2.75 points. You can offer more flexible rates to your clients if you’re not basing the price on the fact that you plan to sell it later. Of course, there are advantages and disadvantages to both approaches. Please note that if you sell more than 75% of your loans it’s a red flag to the SBA.
Staffing and Resources
It is important to define what resources the institution will utilize to execute the SBA loan initiative. This includes defining key roles and responsibilities for both in house and external functions, such as business development, processing, underwriting, closing, compliance, servicing, etc. We go into greater detail on the people and roles in our next post in this series. A defined process that includes outsourcing must be in place and a procedure for vetting the vendor on an annual basis is required.
Delegated Authority versus General Processing
Another item to address in your plan is whether you will pursue delegated authority as a Preferred Lending Partner (PLP) or submit your loans for general processing. The SBA always seeks to transition established SBA lenders to PLP status as it reduces the operational workload for the SBA. In exchange, PLP lenders are allowed to make decisions regarding eligibility and avoid the 7-21 days processing wait time that comes with general processing. The tradeoff is that the lender assumes more risk in exchange for a speedier process. Again, you will need to determine how much risk you are willing to take on and how important the timeline is to your process and client satisfaction. You must weigh the additional risk involved in “PLP” lending versus the time you will save in the process. If you are efficient before and after SBA approval it may be a moot point.
Process and Standards
Your plan should also outline the process and standards you will employ to execute your SBA lending initiative. Because this is a significant aspect of developing an SBA Lending initiative and for ensuring compliance, we will focus on it in depth in part four of this series. An efficient process is the best marketing tool an institution can have. Know that if you are new to SBA lending, or have a small volume of SBA loans, it can be challenging to cultivate the time and resources to understand and stay on top of the process, evaluate eligibility, and manage reputational risk. In those situations, a Lender Service Provider can help you compete with the larger PLP lenders who have an established process and experienced staff.
Overall, your plan should identify the means and methods you will employ to implement and manage your SBA initiative as well as the key roles necessary to achieve success. If you are new to SBA lending or looking to formalize your existing SBA lending initiative, a Lender Service Provider, such as Capital Growth Solutions, can work with you to develop this plan, locate the right people, and define your processes.
In our next installment of this series, we will dive deeper into the key roles and responsibilities for your SBA lending program and what to look for when considering candidates.