Lending Lessons – SBA Loans

Owners benefit as bankers compete for business Wells Fargo veep sees competitive market that favors borrowers


It’s very good, very strong. If I compare what we’ve seen at the end of last year and the start of this year there’s definitely been an uptick. I would use the conclusion of some of the fiscal cliff discussions at the end of the year, as well as the election, as two significant events that created more certainty. Everyone has their views if it’s good or bad, but it created certainty. That created a spike in transactions that needed to be completed by year end, with respect to concern about taxes.


Buying or selling businesses or assets in general, real estate in general. Buyouts. Now we know where the election stands, we are not sure where taxes are going to be in 2013 but we know what they were in 2012, so let’s get our transactions completed.

By far it was the busiest, largest closed loan volume that we ever had in December. Our biggest year ever, and that was on the heels of our biggest December ever. Some of that is the natural growth in our business but there was some pullback into December from 2013, some transactions that might have occurred in 2013 that where consummated in 2012.


We certainly hope so, we certainly want to as businesses feel better about the future, that’s where they make investments, either adding people or by buying additional equipment, and all of those things fit very well with SBA financing. It’s great for long-term investments that businesses make, because we provide primarily term loans. So as businesses make investments, the more certainty, the more activity there is, all of those things lead into SBA financing.


The other big thing that’s occurring is the interest rate is still very low, so the Federal Reserve is still keeping long and short term interest rates low. A lot of businesses are taking advantage of that, and saying this is a great time to borrow money, and we feel more certain about the future so let’s go ahead and move forward with our projects. It’s across the board with people looking to start up businesses, existing businesses doing stuff with their businesses, and then businesses look at refinancing their debt. It’s kind of nice to see.

And then the third thing is, competitively it’s aggressive. All banks are hungry for assets. You’re seeing a very competitive market out there. It is a great time to be an A credit and a borrower.


We’ve got two big initiatives in the ag industry. When you look at the Midwest and outstate Minnesota, we broadened our product reach to include lending directly to farm operators. We’ve seen people buying land, and  then we don’t help them purchase the land but we’ll help them improve the land.

And then another thing is we’re targeting some national franchises that we’re providing more aggressive lending terms to. We partnered with a couple of franchises around the country, and we have loan programs with them for franchisees.

At last, owners start to sell, and SBA product can help, Bremer banker says

Paul Flood, Bremer Bank


We’re very busy. There seems to be an uptick in different types of transactions, and an uptick in overall projects. When the economy was doing poorly, we saw a lot of debt refinancing. So businesses’ cash flow was being restricted, and they were using SBA products to right-size their debt service. That was the same time that the SBA guarantees were raised to 90 percent and the guarantee fees were waived during the Recovery Act. That ended really in 2011, and we started seeing business investments in real estate, into additional equipment.

More of a recent development is the sale of businesses. That came to a halt in 2007 when business started to go bad. Quite often it’s maybe a family-owned business, where maybe the parents had planned to sell to the children, but because of uncertainty they held off on that. And not just the uncertainty but the economics, where the business cash flow was restricted so that taking out debt to do the buyout wasn’t in the best interests of the business. It’s sort of a pent-up demand that the transactions weren’t happening for five years.


It’s really important that in any situation the bank is tailor-fitting a financial solution to its borrower. In a business acquisition, quite often the business is sold for more than the assets of the business are worth, and that’s also something that’s happening in the economy as a whole, with service companies dominating rather than manufacturing companies.

So quite often the purchase price is a multiple of cash flow but there aren’t assets to support it. So the difference between the purchase price and the assets is goodwill, and the SBA says if it’s more than $500,000 of goodwill, 25 percent equity has to be contributed to the financial package. That 25 percent equity can be cash in the form of equity, or it can be a seller providing a note that it will subordinate to the bank and put on standby. So that’s part of the strategy that’s often put into place today.


I can only speak for Bremer. Our credit standards have remained the same throughout the recession. It really comes down to, there’s more and more borrowers that are able to meet those credit standards. It’s absolutely encouraging.

Borrowers with ‘issues’ may find SBA products help, Park Midway banker says

Terri Fleming, Park Midway


The SBA landscape continues to be a place that borrowers and frankly bankers can direct credit needs but adds an extra safety net, for the risk involved with the current environment. In a challenging economy, many businesses are still recovering from the stress of the economic downturn. And the recovery has been perhaps slower than some would like to see. An SBA loan provides a longer amortization, and some benefit to the borrower, that puts an ease on cash flow, in a way that a conventional loan might be stricter.

A borrower who has a collateral shortfall, or needs a longer amortization in order to make the cash flow work, those are the two major benefits of an SBA loan. If a person is going to borrow conventionally for equipment financing, we might do a maximum of five years. With an SBA loan we could do a maximum of a 10 year loan, so the monthly payments are smaller.

A collateral shortfall would not be a reason to decline an SBA request. It’s one of the features that helps a business. If there’s adequate cash flow to repay the debt but not enough collateral to support a conventional loan, an SBA guarantee provides the bank with that extra safety net.


The guarantee amount can range depending on which SBA product is being used. So an Express line, which is a revolving credit line of $350,000 or less, there is a 50 percent guarantee. A standard 7A loan carries a 75 percent guarantee. And the CapLine product, which is newer, is a larger revolving line, up to $5 million, with a 75 percent guarantee. The CapLine product can be issued against contracts or against accounts receivable financing. It’s structured more like an asset-based loan. It has pretty intense monitoring.

It’s a new product of the SBA. If you had a revolving need over $350,000, in the past there was a gap. That’s why the SBA came up with the CapLine. When a business is starting to grow, and post-recession we’re starting to see some businesses starting to boom, it causes a cash flow gap. So that revolving line that gets satisfied by the collection of the accounts receivable, is definitely something that helps the growing business. The interest rate is prime plus 2 and ¾, which today is 6 percent.  Factoring is typically much more expensive.


It depends on the situation. The SBA loan is absolutely the best tool for business acquisition situations. One of the things that occurred in the go-go economy before the crash, a lot of business owners were positioning their business and thinking of selling, and all of a sudden put a screeching halt on that because the business valuation wouldn’t come out. Now more businesses are saying things have recovered, and I’m really going to sell now. I’m done.

All money is green, Fidelity banker says, so owners should choose source wisely

Todd Williams, Fidelity Bank


When you look at the crash, the fall of 2008, everybody at that point was pretty much scrambling. Bankers were scrambling just to accommodate what they had. And clients were just trying to survive. I think banks were just starting to say we’re not making any loans. The SBA loosened up their criteria, expanded the size of the facilities; they also expanded the program by waiving fees for a period of time. At that point, a lot of banks just pretty much started funneling their commercial business more to the SBA loans, especially small banks.

As far as underwriting on SBA lending, it may have loosened up a little bit. But everything comes back to two things: do you have the ability to repay? And I think the SBA, if that’s a little bit sporadic or not a certainty, the SBA guarantee may tip it to where the bank may do that deal. On the other side, if the repayment’s there, but the company is light on collateral, it may tip it where the bank is willing to make that loan.

Last year SBA lending was down. At the beginning of the year some of the programs were going to decrease in their size, and some of the waiving of fees went away as the Recovery Act ended, and also if in general the economy is growing at a certain clip, you’re going to get less activity.


The market kind of drives what we do. One thing we’re finding is we’re doing a little bit more owner-occupied real estate than we have in the past. The reason is, as the prices of commercial real estate have come down, and then some of the other community banks have been impaired, our clients have been looking at that as an opportunity to buy a building now. So we have had more 504 SBA type lending, because they have that confidence.

And secondly, right now you look at the interest rates on a 20-year fixed bond on that 504 component, running around 4.2 percent. Those interest rates are very attractive for our client. Now our client isn’t someone who’s impaired, but they say they sat on the sidelines. And now prices have come down, they’ve got some confidence, they’ve got some liquidity, and this is a time to get in.


Another thing we’re seeing is, we do a lot of working capital lending. Working capital lending has been solid, but if the economy is only growing at 2 percent a year, a lot of clients are holding their cash on their balance sheet, so they’re not using the lines as much as they used to. But we do have clients who are adding lines, or buying another company. The SBA lines are helping us augment the expansions. Our clients have more confidence.

We’ve utilized the SBA Express product in the past for working capital lines. Also, we in the past used the SBA CapLines program for seasonal arrangements, where a customer traditionally didn’t have a lot of firm accounts receivable but they had contracts. The only thing with CapLines is the cost; there’s a pretty significant fee once you go past a year on those. It’s one-quarter of a percent the first year, and then can jump as high as 3 percent in later years. So if you’re going to do a $5 million CapLine, there are pretty significant fees that go along with that. Our clients would rather go direct, with a conventional loan, not SBA.


We’re just really looking for information they’re producing monthly. For us we see the financial statement either monthly or quarterly, a balance sheet or income statement. And then we monitor the inventory levels and the accounts receivable, as well as the accounts payable, and we get that monthly or quarterly. And then we ask for some borrowing base certificate. That would be where basically on a sheet of paper or report, you would fill in what are the levels of accounts receivable and inventory. You subtract any ineligible accounts receivable or inventory, to come up with an available collateral, and then you compare that with what’s available on your line of credit.

ABOUT 2013:

What you’re going to see is one, interest rates in the short term and maybe throughout this year are going to stay stable, they should stay low. You look at GDP numbers for the U.S. and Minnesota, you’re going to find slow growth, and it’s probably at that 2 percent rate. You’ll see slow growth going forward, and you’ll find a lot of competition for borrowers. If you’re only growing at 2 percent, and there are a lot of groups wanting to get into Minnesota, you’ll see a little bit of margin compression. From a credit quality standpoint, I think things are somewhat improving, and unless there’s a big shock to the economy, I think it’s just going to be a lot of blocking and tackling and digging for new business.

All money is green. It’s all the same. It’s how it’s packaged, and can you find people that know relationship lending, working capital lending, can turn around decision very quickly, they don’t have turnover in their staff. Those are the groups that historically have been able to optimize their ability to get new clients.

With SBA lending ‘up, up, up,’ Highland CEO sees more ahead

Rick Wall, Highland Bank


It’s up, up, up, baby, up! We had our best quarter in a while for SBA lending in terms of the loan count, so that’s exciting. SBA has done some work in the last couple of years to enhance the programs. Some of that improvement has expired, but some of the products are still more attractive than conventional loans.

I think there are a couple of things leading to this activity. As an organization we’re just more proactive and more outward focused than we’ve been over the past couple of years. I think companies are starting to now reach out a little bit more, not a lot, but a little bit more, so the market itself is growing. All three of those things combined, including the fact that the programs have been enhanced.

We have started offering a type of loan that we hadn’t written before. That is loans for exporters. The SBA has a program for exporters, and it really helps a bank get comfortable with some of the collateral that exporters have. A challenge for any bank is to accept receivables that are coming from a foreign entity. So if a German company owes you money, it’s hard for a bank to get that back. With the export program, we can get the SBA to stand behind those receivables, and it helps us get more comfortable.


The SBA programs allow us to do some things that we wouldn’t have been able to do without SBA guarantees, such as lend when collateral isn’t as strong as we’d like it, lend when a company is newer, lend when cash flow might be a little bit tighter than you might like. It helps mitigate challenges.


The programs do have a few hard rules that even a preferred lender can’t bend on. Their fee structure, for instance. With banks, they set their own fee structure and their own interest rates. But with the SBA, certain programs charge certain fees and it’s just there. Advance rates, for instance under the SBA 504 program, they have a pre-defined advance rate for certain kinds of loans. They’re typically not far off industry norms but then they’re a hard rule and you follow it.

One other thing that’s a benefit, there’s a program called the SBA 504. It allows you to lock an interest rate longer than typical. Normally it would be five years or seven years, but with the SBA you can lock in a 20-year rate. The 504 is mostly for real estate; you can finance some other hard assets, but it’s most often used for new construction or newly purchased real estate.

Rick Wall is CEO of Highland Bank: 952.858.4753; rick.wall@highlandbanks.com; www.highlandbanks.com

For firms that lack collateral, SBA guarantee may make loan work, says Anchor banker

Melissa Kraemer, Anchor Bank


Across the country and nationwide, it’s on the uptick, and in dollars specifically at Anchor Bank as well. The best thing I can say about SBA is, it gives the banks the opportunity to serve more businesses than before. In 2012 the SBA increased the loan limit from $2 million to $5 million, so that allowed banks like Anchor to serve more businesses.

They also changed their definition of small businesses:: tangible net worth being less than $15 million, and average net income less than $5 million. What they did before is they based it on the type of company and it was also very complicated. The change made it simpler to meet the standards.


From an SBA perspective, the types of projects I’m seeing most are companies that went through the recession, and their balance sheet was beat up a little bit with losses. That’s challenging because they have losses, and then that depleted their equity. As they come out of this they’re able to use the SBA program to expand because we can use a 10-year term. The SBA helps us mitigate the risk.

We’re seeing companies that have needs for equipment, for a lot of manufacturing expansions. Some of our larger projects have been companies that need another production line, but they can’t demonstrate the numbers over five years, but if we can put it over a longer term it works.


The SBA mandates personal guarantees, that’s always been there and continues to be there. However, what I see different is the collateral base that they have. Companies don’t have the personal collateral to expand. They don’t have equity in their homes. They don’t have the collateral where we could do conventional. And that’s one way we can use a guarantee to mitigate. Within the SBA program it’s not different from conventional loans; we look primarily at the ability to repay. The big thing now is looking at historic results, it’s hard to find a company that didn’t have at least a blip during the recession. And it’s one of the real reasons to use SBA.

Melissa Kraemer is senior vice president and SBA manager at Anchor Bank: 651.747.2931;

Venture Bank chief says he looks ‘beyond the balance sheet’

Michael Zenk, Venture Bank


The SBA part of it is extremely important to us. A lot of SBA lending that we do is to help businesses, if they’re growing, expanding, that’s traditional SBA lending. But if they aren’t doing that, how do you expand the SBA lending? So one of the things we’ve done is helping companies that have struggled through the recession. If they are not being treated well by their bank, we can give them a working line. We look beyond the numbers a little bit.

It’s really the same assessment we would do on any business loan. Banks can talk about collateral and cash flow and some of those things, but what it really comes down to is management: management, management, management. Do we believe, by assessing their situation, has management made the difficult decision to get to cash flow positive in the short term, and have they reasonably, in our assessment, turned the company to positive? It’s really beyond the balance sheet.


We’ve always required personal guarantees. But the thing that’s changed the most: what banks are doing a better job today is understanding what other things borrowers are involved with, such as real estate assets and an investment portfolio. You have to understand the global need, and demands. It’s much more thorough today than it was six years ago, looking at their global situation, both personally and in business.

A lot of these business owners don’t understand that we have a business loan relationship with them, let’s say a million dollar business loan, and then a million dollar mortgage on their home, and a fancy $50,000 car. When we talk to them, your golden goose has to pay back not just the $1 million business loan, but five million-dollar loans. We’re looking at their entire situation. That’s changed 100 percent from five years ago. The regulators haven’t changed. Is regulation too tough? No, they’re doing their job.


What we’re hearing, we have 3,000 business customers, and I talk to lots and lots of them on a daily basis. There’s still a lot of concern about what’s going to happen on the political side. We’ve kicked the can down the road, another fiscal cliff is coming, much higher taxes both federal and state, that means I can’t grow my company if I have to pay it out as taxes. Health care, what is the effect of all the new health care coming down? So there’s tons of uncertainty which is causing lack of job growth. The companies I’ve talked to in the last 90 days, not one of them talked about hiring more people because of those factors. It’s a concern.

Jeff Roseland



Paul Flood



Terri Fleming



Todd Williams




Rick Wall



Melissa Kraemer



Michael Zenk