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SBA Guaranteed Loans
The U.S. Small Business Administration, through its 7a program, provides guarantees to banks for loans to small businesses. Highlights of the program:
- Maximum loan amount is $5,000,000
- Typical guaranteed amount is 75%
- Interest rates typically are adjustable based on Prime, but other pricing is possible
- Loan terms usually between 7 years and 25 years and must be fully amortizing
- Loan purposes for almost any business purpose, including acquisition or refinance of fixed assets, working capital and/or business acquisition.
In addition to the credit enhancement provided by the full faith and credit guarantee, there are valuable other benefits of the program:
Income from loan sale and servicing: There is an active secondary market for the guaranteed portions of the loan. Depending on pricing and term, the premium can easily exceed 110. In addition, the bank retains servicing and receives a 1% fee annually on the guaranteed portion. We can show you the math in detail, but a typical loan with an average premium generally shows a return on invested funds (the unguaranteed portion) of well over 20%. And this return include the revenue on the spread between your cost of funds and the interest on the unguaranteed portion of the loan.
Attract and retain bank customers: The SBA program enhances your ability to attract and retain customers and their deposit and merchant relationships by giving you more flexibility in your loan products. Higher LTV's and longer terms become possible. Also, because the guaranteed portion of the loan does not "count" towards your lending limit, you can make larger loans and loans to existing customers that already are near their limit.
USDA Guaranteed Commercial Loans
The USDA commercial guaranteed loan programs are similar to the SBA 7a program in many respects but less well-known. The USDA issues a loan guarantee after reviewing and approving an application package. After the loan closes, the guaranteed portion can be sold into the secondary market for a premium. The USDA has a Business and Industry program ("B&I") for almost any type of business borrower as well as a Community Facilities program ("CF") for non-profit ventures and municipalities.
There are some important differences between the USDA and the SBA programs:
Geographic Limitations: USDA programs are for "rural" areas only, usually defined as areas having a population of less than 50,000. But many places near large metro areas are eligible, depending on the size of the particular political subdivision and other factors. We have access to mapping software to determine the eligibility of a particular address.
Net Worth: The USDA B&I program has strict requirements for a borrower's net worth. This is not a factor in SBA underwriting. (Nor does it apply to the USDA CF program.)
Loan Limits and Guarantees: USDA B&I loan limit is significantly higher than the SBA max of $5 Million. And there is an 80% guarantee (vs. SBA's 75% guarantee).
Property Types: An important difference between the programs is that USDA funds can be used for commercial investment properties. There is no "owner-occupied" requirement.
Loan Term: Like SBA, the loan must be fully amortizing and the term tied to the use of proceeds. USDA B&I will permit up to a 30 year amortization period for real estate loans and the CF program up to 40 years (vs. SBA's 25 year maximum).
Lenders: Unlike the SBA program, the USDA programs permit life insurance companies to lend and obtain loan guarantees.
Processing: These USDA programs are administered by offices located in each State, unlike SBA where there is central processing.
Guarantee Fee: The USDA B&I guarantee fee is 3% of the guaranteed amount. The USDA CF program guarantee fee is 1% of the guaranteed amount.
Pricing: The USDA programs offer greater flexibility in interest rates, base rates and adjustment periods.
Like the SBA program, the guaranteed portion of the USDA loans can be sold on the secondary market at premiums of up to 110+. Banks also can receive continuing servicing income.
And remember, using one of the guarantee programs will allow your commercial lending department to make loans in excess of your lending authority because only the non-guaranteed portion applies to that limit.
