Lending Institutions
by Geory Stivers, CBI
Vice President, Professional Business Brokers, Inc.
This is a two-part article discussing small business funding, lending environments and commercial loan programs. The first part discussing small business capital was published in the October 2007 issue of Space Coast Business.
The next obstacle to overcome is where to go to apply for funds. Most business owners chose their bank because of convenience. Time is money. A branch on the corner and online banking beat out interest paid on checking. Sound familiar? The branch employees are trained to handle all their customer’s needs and competition has become so great that most are trying to be everything to all people. Unfortunately all lending institutions have different guidelines and lending criteria, known in the industry as a lending box. To further complicate things; sometimes this “box” will change quarterly, largely based on the performance of their portfolio. In this environment, a lender may have a large number of poorly performing residential construction loans. As a result, the board of directors may decide to stop all construction loans or all loans to the construction industry.
So how do you know what your bank’s “box” is? Ask who is in charge of the commercial lending division. Not the branch manager, someone who does commercial lending all the time. Generally they are a V.P. or Senior V.P. and work out of corporate. These are busy individuals and the time you have with them should be productive, so do your homework.
Depending on what kind of loan you need, you may be shuffled around between the V.P. of SBA lending and the V.P. of conventional, small business lending. Understand they are very different and few banks have 1 person who handles both programs. Once you have an appointment, make sure you ask about their “box”. Remember, they are all incented by loan production and trained to tell you they do it all and let upper level management decide what to approve. You will waste a month or more only to find out they are asset lenders, not cash flow lenders.
Most banks offer commercial lending of some kind, however most require some form of collateral to secure the loan. If you are in need of a line of credit or a business acquisition loan, chances are you will need a bank that cooperates with the Small Business Administration. Just because a bank does SBA lending does not mean they are a “cash flow lender”. There are a number of non-bank lenders and some banks that primarily focus on SBA loans. If you need an SBA loan, go to an SBA specialist.
SBA
In the Small Business Act of July 30, 1953, Congress created the Small Business Administration, whose function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." The charter also stipulated that the SBA would ensure small businesses a "fair proportion" of government contracts and sales of surplus property.
Over the past 47 years, SBA has grown in terms of total assistance provided and its array of programs tailored to encourage small enterprises in all areas. The SBA also provides loans to victims of natural disasters and specialized advice and assistance in international trade.
Nearly 20 Million small businesses have received direct or indirect help from SBA programs. With the current business loan portfolio of roughly 219,000 loans worth more than $45 billion the Small Business Administration is the largest single financial backer of U.S. businesses in the nation.
The majority of SBA programs are government guarantee loans. The SBA will guarantee a percentage of the money lent, greatly reducing the bank’s risk. The theory is by reducing the amount of money at risk you reduce the amount of collateral. Unfortunately, many lending institutions still have minimum collateral requirements and use the SBA to further reduce their exposure.
Banks or non-bank lenders that specialize in SBA typically lend corporate or borrowed funds, close the loan, then sell a loan bundle on the secondary market. Because the focus is making a “saleable” loan, the lending criteria are influenced by an unknown 3rd party. To get the highest premium, these loans are usually made at a higher interest rate. Expect prime plus 2.00% to 2.75%, variable, adjusting quarterly. However, the company’s sheer volume allows for a more aggressive underwriting approach and they have maximized efficiency. They target loans from $250,000 to $2,000,000.
Any bank can apply for SBA assistance by completing the correct paperwork and submitting it to the local district office. There are 2 districts in Florida, North located in Jacksonville and South located in Miami. This tends to be a long process as the bank needs to wait for the district office to fully underwrite the loan. To save time, a bank looking to do multiple SBA loans can apply for CLP certification. The Certified Lender Program puts more responsibility on the bank and reduces the underwriting done at the district level. Often this is just the preliminary step the bank is taking to reach PLP status, or Preferred Lender. If you are in need of a SBA loan, make sure the lender is PLP approved. This puts maximum underwriting responsibility on the bank and reduced the district offices to almost nothing. The bank can fax a couple of pages and often will get an authorization number in days, not weeks.
Part 1 - Small Business Capital
Geory Stivers, CBI is Vice President of PBBI- has spent 13 years in commercial banking and SBA lending, holding high-level management positions with a number of National lenders. Mr. Stivers was awarded The Million Dollar Plus Award in 2006 and will receive the same award in 2007 from the Business Brokers of Florida. Mr. Stivers is a graduate of Riverside Military Academy, Brevard Community College and fulfilled his undergraduate degree from the University of Central Florida. You can contact Geory Stivers at gstivers@pbbi.com or at (888) 287-7763.
