SBA Loans: Lowering Risk & Increasing Profitability

SBA loans provide a variety of solutions for not just borrowers, but for lenders as well. One of the key advantages of SBA financing is that a lender can refinance an existing commercial loan on their books and convert it to an SBA loan. For example, in this challenging economy, you may have some borrowers that are getting cash flow strained due to rising interest rates or lower sales. Provided the borrower has not been over 30 days late on the existing debt in the past 3 years, the lender can refinance the loan into an SBA loan.

This can apply to other situations as well, maybe you have a fast-growing business that has a $1,000,000 line of credit, that is maxed out and not revolving. This borrower is probably asking for an increase in their line to support their growth. However, the lender may not feel comfortable with this ever-increasing line of credit that is probably under-secured or just secured by receivables and inventory. By converting this line into an SBA 7a loan and restructuring it, the bank can term it out over 10 years and obtain a 75% guarantee. The lender might even increase the loan to $1,200,000 to provide the borrower with some additional working capital. The result is that the lender has helped the borrower improve their working capital position with additional funding. Additionally, the lender benefits by lowering their risk on this loan from $1,000,000 to $300,000, since 75% of the loan is guaranteed by SBA. In addition, the lender can sell the SBA guarantee and make as much as $90,000 on the sale.

In this situation, the lender has used an SBA loan to help the client continue to grow their business, minimize their exposure, and turn what could be a criticized credit into a $90,000 gain.

If you’d like to learn more about lowering risk and increasing profitability with SBA loans, find more articles on our dedicated SBA Resources Page or reach out to Servion's Commercial Loan Resources.