In what situations does an SBA guaranty make a loan viable?

Years ago when I was starting out in commercial lending, I would hear senior lenders talk about using an SBA guarantee to shore up a loan. This leads to an important question: when does it make sense to use an SBA guarantee to mitigate risk?

We all know the basics of commercial lending, in that, you want to have a primary and secondary source of repayment, and evaluate the following credit components to make a loan:

 1. Experienced management

2. Good repayment ability

3. Collateral

4. Good borrower credit

5. Appropriate down payment/borrower net worth

 In general, the guarantee can’t help you if you have weak management, no historical repayment ability, or poor borrower credit. These are key fundamentals of a loan; and while the SBA guaranty can limit your loss, lack of the above-mentioned components increases the risk of making the loan. Also, the SBA guaranty is a partial secondary source of repayment, the bank still has 25% of the loan at risk.

 Nevertheless, the guarantee clearly provides an enhancement to collateral, as 75% of your loan is insured. It also helps to offset risk if you have a lower down payment, since SBA is subsidizing 75% of any loss. Therefore, lower down payments or lack of collateral are typical weaknesses where lenders can use the guarantee to reduce their exposure.

 You might be asking: what about start-up loans?  The SBA and community bankers like the idea of being able to help borrowers start a business, but it does create a much higher risk profile. A start-up relies heavily on management ability, and as a new business with projected income, what are your primary and secondary sources of repayment?

 The SBA is a great program and certainly enhances the bank’s ability to help more borrowers, but it’s important to consider when it’s appropriate to use it to make a loan bankable.

Article by: Brian Carlson