Three Reasons Why Lenders Should Make SBA Part of Their 2024 Strategic Plan

The SBA offers great programs that enhance a financial institution’s ability help business owners. We frequently see the SBA 7(a) loan program utilized to finance the purchase of a business, refinancing of debt, and for improvements and working capital. And while there are many ways for a borrower to leverage the program, it’s also a good tool for lenders to use to improve liquidity, profitability, and to mitigate risk.

1) LIQUIDITY

Most financial institutions are struggling to grow deposits - so what is the most profitable way to serve your clients and maximize use of your institution’s liquidity? Suppose in 2024 a lender funds $10,000,000 in SBA 7a loans and sells the $7,500,000 of guarantees. They would end up with $2,500,000 of loans. Therefore, the lender has only used a small number of deposits to generate $10,000,000 in loans for their clients.

2) PROFITABILITY

In today’s market, the lending in the above example should earn at least 9.0% premium on the $7,500,000 of SBA guarantees sold, or $675,000 in gain. The lender also gets to keep a 1.0% interest strip on that $7,500,000 in guarantees sold, or $75,000. If your net interest margin is 5.0%, then the lender will earn another $125,000 on the $2,500,000 of unguaranteed loan portions retained. In reality, the loans will probably be funded evenly over the year so the accrual of interest and servicing if averaged would be half of those numbers. But still, the lender will have generated $675,000 in gain on sale, $37,500 in servicing and $67,500 in NOI, totaling $775,000 of profits on $2,500,000 in retained balances.

3) RISK MITIGATION

Given the current economic conditions and high-rate environment, many borrowers are stretched and often the only way to help them is through the longer amortizations and flexible terms available through SBA. Plus, the lender may need the SBA guarantee to mitigate the higher risk that exists with some businesses. Lastly, the SBA PPP program was understandably popular with borrowers and now those businesses are expecting lenders to offer SBA programs to help them grow their operations.

There are many ways to continue to serve your customers in today’s market while reducing risk to your institution. Proving solutions through SBA loans is a mutually beneficial way to improve liquidity for you and your customers. By utilizing Total SBA, you can immediately create a highly profitable SBA program without any overhead expense and at the same time provide needed services to your business clients.