When Bruce Lammers, chairman and CEO of Ridgestone Bank of Brookfield, Wis., met with a group of dentists about using a Small Business Administration loan rather than a conventional loan to finance an acquisition, the dentists said they perceived SBA lending as a very tedious process.
Lammers responded by saying that he perceived a root canal as tedious. “But if you are going to get one,” he said, “you go to someone who knows how to do it. It’s all they do. If you come to bank with us, we have people who know how to do root canals.”
Ridgestone Bank is the top SBA lender in Illinois and 11th nationally, and its specialized knowledge of SBA lending has helped it grow. “In a time when banks have been shrinking and having layoffs, we’ve actually stabilized and added to our staff in the last couple of years,” Lammers said. “It’s paid off for us in that we’ve survived and thrived. It’s a tool to continue serving customers and continue expanding when you are limited in your options to find new capital.”
Lammers’ experience reflects those of other community banks that focus on SBA lending: doing so requires specialized expertise and can be difficult, but it can also provide the means to win clients and to grow along side them, even in difficult economic times.
David Bartram, executive vice president and SBA division manager at Seacoast Commerce Bank of Chula Vista, Calif., credits SBA lending for Seacoast’s strong financial results in 2011, a year in which Seacoast funded $104 million in SBA loans. But he cautions that success in SBA lending requires attention to detail.
“There are 432 pages in the standard operating procedures manual, and if you make an error, you are at risk: the SBA could come back if that loan failed and say, ‘this loan was not eligible, you didn’t adhere,’” he said.
One of the most common mistakes that lenders make in closing SBA loans, according to both Bartram and Lammers, is not verifying the source of the borrower’s down payment and documenting it correctly.
“You have to be exact,” Bartram said. “Just getting close doesn’t work.”
Lender vs. Preferred Lender
Both Ridgestone and Seacoast Commerce are SBA Preferred Lenders and have found that designation helpful in communicating their expertise to customers and in increasing the speed with which they approve loans.
Yet, other banks prefer not to be SBA Preferred Lenders because they have found that not having the designation helps reduce their risk of making an error.
“It’s a lot less risky for us to go with the SBA approving the loans beforehand,” said Stuart N. Olson, chief credit officer of RepublicBankAz, N.A. of Phoenix. “You can make a mistake and maybe the business isn’t eligible to qualify, maybe because of a liquidity issue. I don’t have to worry about that because I’m sending it to the SBA.”
David Gill, co-founder, president and CEO of MileStone Bank of Doylestown, Pa., also sees not being an SBA Preferred Lender as an advantage. “At the end of the day, I don’t give up anything,” he said. “I’m still able to turn these opportunities around really quickly. The extra due diligence along with the fact that it can be done in a relatively short timeframe is perfect for us and our clients.”
SBA lending plays a significant role in the loan portfolios of both RepublicBankAz and MileStone: it is about 70 percent of the loans RepublicBankAz originates and about half of the loans MileStone originates. However, both banks outsource some of their SBA loan application processing to firms that specialize in packaging the loans. These firms ease the burden of keeping up with the changing SBA rules.
“It wasn’t something we were confident we could handle in-house when we started, and we found it really made sense to outsource that,” Gill said.
Banks that have mastered the ins-and-outs of SBA lending, whether as SBA Preferred Lenders or not, can benefit over the long-term.
“The SBA program provides, regardless of down times or good times, long-term financing to businesses, and banks don’t typically provide long-term financing. We might finance equipment and maybe do a three-year note. Under the SBA program, you can offer the client a 10-year note for equipment or even inventory,” said Bartram.
The opportunity to provide long-term financing also means community banks can use SBA lending programs to develop relationships with businesses they might not otherwise be able to lend to and, over time, grow that relationship.
“It gives us the opportunity to make that loan, to control that relationship, and to accumulate the deposits related to that relationship, get referrals from that relationship, and to grow it,” said Gill. “As the company advances to the point where it doesn’t need SBA lending any longer, we have the right of first refusal essentially, because we’ve had a chance to position ourselves and to grow that relationship in all aspects.”
Recent economic conditions and the lending behavior of the larger banks over the last few years have increased the opportunity for community banks to provide SBA loans.
“We have seen a lot of relationships start because the customer has moved away from one of the larger institutions,” said Rodney D. Larson, CEO and president of RepublicBankAz.
“A lot of big banks aren’t going to lend to certain industries now. For example, a construction company wouldn’t be able to get a loan at Bank of America or Wells Fargo. They’ve found that banking relationships they’ve had for 10 years have gone away because someone at the board has decided that they don’t want to deal with that type of company anymore,” said Olson.
All four banks have average SBA loan sizes in the $750,000 to $1.5 million range. The expertise required to originate and monitor SBA loans can make focusing on small loans an expensive proposition. Seacoast’s SBA portfolio includes loans from $100,000 to $4 million, a range that Bartram believes works well for a community bank. Large banks can justify doing more smaller loans because of the efficiencies that come with their larger loan volumes, he said.
Community banks succeed when they are focused on a specialty, he said. “I believe that to be a successful community bank, you have to be a niche player. That’s what our bank has done with the SBA program.”
Elizabeth Whalen is a contributing writer based in Berkeley, Calif.
Copyright (c) May 2012 by BankNews Media