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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2016

Small-Business Loans Make Sense

A niche rejected by many banks is a business opportunity for commercial mortgage originators

In 2012, there were about 28.1 million real estate investors in the United States. As of the end of first-quarter 2013, the Federal Registration of Mortgage Loan Originators listed 394,000 registered loan originators. These days, because many loan “brokers” don’t feel they can spend the time or money to register or join associations, the figure for registered originators undoubtedly understates by a sizable amount the number of intermediaries placing loans in this country.

There are a whole lot of loan originators going after a whole lot of investor loans. And yet, they are overlooking a significant borrower base of nearly equal size: small-business owners.

The Small Business Administration (SBA) reports that the 28 million small businesses in the U.S. account for more than half of all sales and jobs, as well as two-thirds of the net new jobs created since 1970. Yet many of those businesses find it difficult, or even impossible, to find essential commercial financing.

The vast majority are home-based sole proprietorships or claim no employees other than the owner. By these standards alone, these businesses cannot qualify for most bank or even SBA financing. What’s more, many small-business owners cannot qualify for traditional financing because of a lack of collateral, poor credit, insufficient income and a number of other disqualifiers.

Even more established small-business borrowers are being turned away by big banks, a trend that began during the financial crisis and continues today. According to the Federal Deposit Insurance Corp., the total value of small-business loans held by U.S. banks dropped by more than 15 percent between 2008 and 2015. That reluctance to lend creates a need for industry professionals who can help small-business clients find new sources of funding — just the type of work that is the specialty of commercial mortgage originators.

If you are a loan broker focused exclusively on originating investment real estate loans, you may believe that small-business loans are not for you. But it’s worth reconsidering that reluctance. Much of what you thought you knew about the downside of originating small-business loans no longer applies in today’s financial marketplace.

Modern small-business loans

Historically, loan brokers have shied away from originating small-business loans for two primary reasons: the complexity and time allocation associated with closing such loans, and the low level of compensation generated from a small-business loan closing. These are yesterday’s issues, however — from a time when the financing options available to most small-business owners were either time-consuming SBA and bank loans, or factoring and asset-based loans for unbankable borrowers (which often required skills and knowledge not common among mortgage brokers).

Ironically, when it comes to financing, the Great Recession turned out to be one of the best things to happen to small-business owners and loan brokers alike. As banks and traditional lenders exited the small-business loan space, innovative, tech-based small-business funders entered. Armed with Silicon Valley technology and venture capital, this new breed of lenders perfected crowdfunding and, with the help of thousands of individual investors, became significant sources of loans for small-business owners.

Much of what you thought you knew about the downside of originating
small business loans no longer applies in today’s financial marketplace.

It seems that every day now a press release is issued about a large private equity firm or institutional investor throwing millions of dollars behind one of these small-business lending startups. The fresh look, technology and common-sense approach that these new lenders bring to the small-business loan space is good news for both borrowers and brokers. Finally, small-business owners — bankable and not bankable — have a resource that can dependably provide the capital they need to foster business growth. At the same time, loan brokers have a viable, easy-to-navigate and profitable loan niche to exploit.

In addition, the Securities and Exchange Commission (SEC) expanded the pool of possible small-business investors this past October, when it eased restrictions on crowdfunding participation by nonaccredited investors. Beginning this year, the nonaccredited class — those who do not meet previous SEC net-worth requirements — will add new lending resources to crowdfunding platforms, a space that is already familiar both to commercial real estate investors and commercial mortgage originators.

Brokering small-business loans

Today’s new breed of tech-enabled lenders offer four compelling reasons for originators to rethink their aversion to small-business loans.

  • Online processing: In most cases, documentation has been whittled down to a one-page application, plus a half-dozen or so accompanying items.
  • Quick turnarounds: Loans close in as little as two days to two weeks; no in-person closing is required; and there are no out-of-pocket costs for the borrower. Loan documents are signed electronically and loan costs are netted from proceeds.
  • Competitive terms: Loan periods go out to five years, and rates start in the single digits. There are no prepayment penalties, and unrestricted working capital ranges from $2,000 to $2 million. 
  • Good commissions: Small-business lenders now pay broker rebates from 1.5 percent to 10 percent, and higher.

Room for growth

The new wave of small-business financing is attracting borrowers fast via the Internet, but it is still only beginning to get the attention of commercial loan originators. The ground floor is still open.

The next time you find yourself frustrated because you burned two or three months of your time working on a million-dollar real estate loan that blew up at the closing table (along with your $10,000 commission), think about the $100,000 small-business loan you could have closed, perhaps in days, with a similar appealing commission to show for it. 


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