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The Small Business Lending Tool Every Community Lender Needs

There’s a certain satisfaction that comes from patronizing local businesses. They bring character, quality of life, and jobs to communities. Some become defining landmarks. That’s why financing small businesses hits the heart of where community banks can provide real, lasting value.

But, extending credit to small businesses isn’t always an easy decision. There are more than a few reasons why:

  • Small businesses owners may possess a talent or trade, but not financial acumen.
  • Small businesses may not have experienced financial professionals on-staff.
  • New small businesses don’t have a proven track record of success.
  • Small businesses can lack the collateral needed to secure a loan.
  • Some small businesses have unbalanced revenue that is seasonal or cyclical.

For these reasons and more, many small businesses struggle with access to credit. At the end of 2017, more than a quarter of businesses surveyed by the National Small Business Federation said they couldn’t obtain adequate financing. It presents frustrations for both parties to the transaction: the borrower striving for business success, and the helpful lender still wary of risk.

Fortunately, the story needn’t end with those frustrations. Lending tools are available to lenders committed to supporting small businesses. The Small Business Administration offers programs to help lenders extend credit by offering a guarantee of up to 75% of the loan amount.

Every community lender should have these resources in their small business lending toolkit. Here’s a look at the key reasons why.

Small businesses seeking loans for reasons other than real estate are very underserved.

Over time, commercial banking has trended toward more commercial real estate loans (CRE). Some of this is due to the time lenders have spent mastering CRE transactions, the availability of real opportunities, and the perception that the collateral is better.

This preference for real estate loans has come at the expense of businesses that need to finance things like equipment and machinery, technology, or working capital – known as commercial and industrial (C&I) lending. As lenders have focused more on CRE, they haven’t developed the same expertise in C&I loans, which puts them outside of their comfort zone. This has created a sizeable gap in the credit marketplace – which presents real opportunities for willing lenders.

If a C&I loan to a small business doesn’t fit for your typical loan profile, consider whether you’d extend credit with the support of a loan guarantee. You might be surprised by the diverse pool of new business customers you can now responsibly serve.

Reasonable risks can be mitigated.

Let’s be clear – an SBA guarantee does not mean extending credit to a business in danger of not repaying its loan. There are a number of reasons that a solid business may not meet the criteria for conventional credit, including insufficient collateral, high leverage, limited business history, seasonal revenue, or a recent bad year. An SBA guarantee compensates for reasonable risks and allows you to safely extend credit.

Because it is obligating U.S. taxpayers with its guarantee, the SBA will want to establish good likelihood of debt repayment before approving a guarantee. The SBA is a cash flow lender, and one of the central things they will evaluate is if the borrower can realistically repay the SBA loan and all of its other obligations from the operations of the business. There are some nuances in the way the SBA calculates debt service coverage, but they are typically looking for analysis that shows debt service coverage at a minimum of 1.15 to 1.00.

Building Customer Loyalty.

Many small businesses will have ongoing credit needs throughout the life of their business. This can be especially true in industries like manufacturing or contracting that need to continually invest in heavy equipment, machinery and technology.

Because these businesses are likely to experience challenges accessing conventional credit, a solution-oriented lender equipped with SBA lending tools offers real value – and that value is rewarded with long-term loyalty.

Not only do small businesses need loans, but a full spectrum of banking services like depository, cash management, credit cards and insurance. Showing these customers you have the solutions to meet their credit needs can open the door to other services that build a more robust and satisfying long-term relationship.

Generating valuable non-interest income and increasing liquidity.

There is a strong and active secondary market for loans backed by the SBA. Lenders can sell the guaranteed portion of the loan, generating significant amounts of noninterest income and increasing liquidity that allow you to continue making loans. This can be a particularly beneficial strategy for banks with high loan-to-deposit ratios. Here’s a simple example to demonstrate the powerful potential impact of this strategy.

Take a lender that makes $10 million in SBA loans.  The guaranteed portion that can be sold typically represents 75%, or $7.5 million. The noninterest income generated from this sale would amount to approximately $750,000! This would have a dramatic impact on the income statement, and further mitigate any additional risks.

Banks that help to build the local community quickly become its cornerstone. Any lender that is serious about supporting small businesses should have a robust financial toolkit – with SBA loans as one of your most valuable and utilitarian tools.

Mike Slater is the president of VITAL Financial Services, a lender service provider to community banks with expertise in SBA, USDA and C&I loans. VITAL provides comprehensive support to lenders that includes loan sourcing, underwriting, sale and servicing. Learn more at


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