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The third issue involves the SBA's new standard operating procedure (SOP), which took effect this past August. While the SBA reduced the size of its SOP, it also reduced the required loan to value (LTV) for most special-use-property purchases from 85 percent to 80 percent. This is delaying many planned purchases because borrowers must build up their cash to meet the new requirement.
The SOP also requires gas stations that are more than five years old to obtain a Phase II environmental site assessment and indemnification agreements. Many borrowers wishing to finance gas stations that are older than five years are therefore looking for other financing options.
There also are supply-side liquidity issues on the part of banks that have affected SBA loan volume. Typically, banks that fund SBA loans intend to sell the debt into the commercial secondary market. If they don't do this, they must account for the full loan balance in their reserves.
By selling the guaranteed portion of the loan, banks need only account for the remainder in their reserves. For example, if the SBA guaranteed 75 percent of a 7(a) loan, the bank would need only account for 25 percent in its own reserves. This gives the bank higher liquidity and more money for lending. Now that the secondary market has few buyers, however, more banks are finding that they must portfolio their loans -- something they never intended to do.
A big reason that demand for SBA 7(a) loans has fallen in the secondary market is that many market investors have their funding sources tied to the London Interbank Offered Rate (LIBOR). And LIBOR has increased dramatically against the prime rate to which most SBA 7(a) loans are tied. When the LIBOR is 4.3 percent and prime is 4 percent, for example, it no longer makes sense for foreign investors to purchase securities linked to the prime rate.
The SBA has recognized this problem. This past November, it started to allow banks to use the one-month LIBOR plus 3 percent, in addition to the prime rate, as the loan's base rate. This change should help to eliminate the LIBOR/prime spread issue and allow more banks to sell these loans on the secondary market.
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Despite these supply-and-demand issues, SBA loans are still available to small-business owners, and banks are still providing them.
Try getting your small-business clients a carwash, restaurant or hotel loan with straight conventional financing at any reasonable LTV -- it probably won't happen. With limited options for conventional lending for high-leverage loan requests, brokers likely will find the SBA to be the funding choice for many owner-users in today's market.
Jeff Rauth is president of Commercial Finance Advisors Inc., a national commercial mortgage broker. He also has
an online store for commercial mortgage originators, where he offers, books, fee agreements, DVDs, spreadsheets, etc., for brokers at www.cfa-commercial.com/store.html. Reach Rauth at email@example.com or (248) 885-8797.
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