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SBA---Not the bargain that it once was? by Bob Rodi, CLP (Under the bill passed by Congress, the maximum federal guarantee would be raised from $1 million to $1.5 million. In the SBA Express loan program credit available would be expanded from $250,000 to $350,000. The bill also establishes a graduated maximum fee scale for both lenders and borrowers. It makes other changes that make other financial alternatives, such as leasing, look more attractive. ( Our street fighter Bob Rodi tells us the real inside, not just the "spin.") Earlier in the year I had written to you regarding information that came out of the IFA (international franchise association) meeting in Las Vegas. There were pretty strong indications that the SBA was changing their program and the gist of the statements, by more than one lender, was that they (the lenders) may pull out of the market if the SBA got out of the guaranty business. http://www.leasingnews.org/archives/October%202004/10-04-04.htm#sba As I understand it that is exactly what has happened here. The “guarantee”, has been replaced by something akin to a “user fee”. I am guessing that these fees were all formerly classified as “loan guarantee fees”. They have been increasing steadily over the past year. Some recent competitive information I came by, from two very prominent “Preferred SBA Lenders”, detailed some very significant changes in their franchise programs as detailed below: LTV for a start up was decreased to 70%. It appears that this is the limit for the first and second franchise location even if those transactions are RE secured. The “loan guarantee fees” range from .86 to 2.75. This is a significant increase and obviously scaled toward the perceived risk in a transaction The rate that was quoted is floating indexed to prime at “prime plus 2.75%” An 80% LTV would be extended to operators on their 3 rd location with a minimum of 3 years in business. Terms are extended to 7 years (84 months) This would mean that an average to good applicant, would have a monthly payment of approximately $2270.00 for an 84 month loan of $140K. This takes into account the current prime + 2.75 rate, as well as a middle of the road user fee of 1.5% of cost. This would put the all in rate for an SBA loan at approximately 9.00%-9.5% floating, with rates going up. I believe that you will see the “user fees” applied in an arbitrary fashion by lenders, despite the fact that there is allegedly some type of “sliding scale” mechanism that specifies how these are to be assessed. This loan would be RE secured by the applicant. I can offer virtually the same loan structure to a qualified franchise applicant at or below 10%. While we all expect rates to go up, I do not think that funding sources who may be tied to treasuries, LIBOR, or some combination of indexes will move to increase rates as fast as banks do. In addition, even if the differential is 150bps between cash flow financing and SBA financing, there are a lot of people that would rather not go through the trouble of doing an RE secured transaction for that kind of transaction. The difference between 9.25 and 10.75 is about $100 per month for $140K. That is not going to deter an applicant that is looking at an overall investment of $200K if the latter offers a more streamlined, user friendly process that gets their location open months sooner. Another recent report that I came across detailed that SBA loan application volume dropped from approximately $69MM to $53MM in October when the new fee structure took effect. Many critics of the changes are blaming this drop in volume on the changes in the SBA program. In my opinion, the SBA does not appear to be the bargain that it once was. The new SBA regulations also prohibit the use of “Piggy Back” loans. This was a loan structure where a bank would do a fully secured senior loan in first position and then “piggy back” a junior SBA loan secured by a second position and the SBA guarantee. This is no longer allowed. SBA loans are definitely not the “no brainer” loans that they used to be for banks. With the amount of risk to the SBA lender increasing dramatically, I think that we will see many lenders re-thinking their strategy with respect to these loans. There is no doubt that it will get tougher to qualify for an SBA loan while, at the same time, they will become more expensive. I think that this bodes well for those of us that have developed excellent risk management strategies in specialty finance areas such as franchise finance, medical practice finance, and other “cash flow” based lending products. While I don't think that the playing field will ever be leveled with respect to rate, I do think that two things may happen. The better credit applicant may think twice about using RE secured, floating rate SBA loans when the rate differential closes to within 100 bps and a cash flow lender can extend a fixed rate that will provide protection in a rising rate environment. Secondly, conventional cash flow lenders and leasing companies may begin to secure weaker transactions with real estate, which may make their rates more competitive. For example, LeaseNOW, Inc. is considering a merger/acquisition with a mortgage company that is currently licensed in 36 states. This is a strategic “build it or buy it” decision for us that will greatly extend our ability to structure loans in the franchise industry and plug the holes that will be left by the changes in the SBA programs. I believe that many companies, who were formerly tied to the small ticket, app only leasing business will evolve in this manner as that type of volume grows increasingly elusive. Bob Rodi, CLP
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