The importance of SBA lending in the current Banking environment

SBA Profits

Given the recent events in the banking industry, SBA lending deserves a second look for the advantages it offers. The key to SBA 7a lending is that the government guarantees 75% of the loan and this full faith guarantee is easily sellable on the secondary market for premiums recently as high as 15%.

Liquidity

Aside from its earning potential, the liquidity component of SBA lending is especially valuable right now, given the high cost and scarcity of deposits. Unlike traditional commercial real estate loans or C&I loans, which cannot be easily sold or participated, SBA loans can be sold immediately and without any buyer re-underwriting the transaction.

Interest rate sensitivity

Having seen years of low interest rates, it was impossible for a bank not to have funded some portion of their portfolio into low fixed rate loans, which are now far below their net interest margin targets. However, those banks that have been active with SBA lending, which is almost always variable rate, have had the interest rates float up as the Federal Reserve increased rates.

Risk Mitigation

Looking ahead, as banks tighten their lending either because of liquidity issues or stricter underwriting guidelines, more borrowers will be turned away by their banks as they seek financing. SBA lending may be a way for your bank to pick up some of these clients and use the SBA guaranty to mitigate 75% of the risk of that loan.

CAMELS

It’s clear to see that SBA loans can positively influence virtually every component of your CAMELS rating. If you would like to learn more about how to grow this part of your institution, please reach out to us at Total SBA and learn how we can make SBA lending a successful part of your bank.

For more information about profitability and revenue generation, download this one-pager.

Article by: Brian Carlson