Commercial mortgage brokers specializing in U.S. Small Business Administration (SBA) loans have largely overcome the negative perceptions about the program, but they now face another problem: managing the expectations of their borrowers.
Despite improvements to the process, the SBA still runs a government program that presents a host of challenges for closing these loans. Yet, borrowers expect greater speed and certainty, and their rising demands are creating a widening gap between what they want and what can be accomplished via the SBA guidelines. This presents a sticky situation for mortgage brokers, but also an opportunity to race ahead of the competition.
There is a great deal of misinformation about SBA loans. Over the past few years, however, perceptions have changed as SBA lenders and the agency itself have improved the process. Prior to the Great Recession, it was commonplace for bankers to avoid the SBA at all costs. They would do the loan conventionally and avoid the perceived hassle that went along with the government programs. It didn’t matter that SBA loans carried the advantages of longer terms, lack of loan covenants and lower equity-injection requirements.
Negative perceptions led to the idea that SBA loans were a last resort. If you were in the SBA world during the recovery years, you were likely spending a good portion of your day trying to convince borrowers that these loans didn’t take six months to complete — as they were told by a banker — but could close in as little as 60 days.
The 7(a) loan, the SBA’s flagship program, can be used to finance just about anything a small business might need, up to a balance of $5 million.
Today, SBA lenders are more active than ever. The 7(a) loan, the SBA’s flagship program, can be used to finance just about anything a small business might need, up to a balance of $5 million. The SBA 504 program also offers fixed-rate financing for hard assets, such as real estate and machinery. SBA 7(a) loan volume has been hovering around $25 billion per year, compared to less than $15 billion per year in 2007 and 2008, according to SBA statistics. Lenders are now successfully promoting SBA loan products as a smart first choice for small-business owners.
Now, however, mortgage brokers who offer SBA financing are confronted with a new problem. Borrowers demand more today and their expectations keep rising, but improvements that have quickened the borrowing process have started to plateau. Suddenly, there is a disconnect among borrowers and lenders. This gulf between the customer’s expectations and the reality of the SBA borrowing process is widening.
In this new world of next-day delivery, people expect to close fast. But let’s face it: SBA is still a government program. Although the agency has made great strides in streamlining the process, the private sector also has rocketed ahead, making other types of commercial mortgages available at greater speeds. In some cases, for example, a small-business owner can go on the internet tonight and have $100,000 in their bank account tomorrow. Contrast that timeline with SBA loans, which can take anywhere from a few weeks to a few months, depending on the situation.
SBA loans are complicated, particularly the 7(a) loan. The program is flexible almost to its detriment. Lenders have to be nimble to tackle a wide array of projects ranging from business acquisition, construction and debt refinance. You could, for example, find yourself putting the finishing touches on a 7(a) loan to expand an ice cream store, and then have to switch gears completely to start work on a 7(a) loan for a manufacturing company that generates $50 million in revenue and has hundreds of employees. These are two completely different businesses with different needs, unique metrics to underwrite and a varying quality of financial reporting.
These loans are not a check-the-box type of product. The real work comes through analyzing the financials, asking insightful questions, weighing strengths and weaknesses, and finding ways to make deals work.
Some say technology, and artificial intelligence in particular, can further streamline the process. Today’s technology allows us to extract numbers from financial statements, drop them into a spreadsheet, make calculations and determine if those calculations meet the debt-service-coverage ratio criteria. That said, these tasks are ultimately an inconsequential part of the job for an SBA underwriter. These loans are not a check-the-box type of product. The real work comes through analyzing the financials, asking insightful questions, weighing strengths and weaknesses, and finding ways to make deals work.
Consider the business that had an off year because a hurricane slammed its community and shut down the business for three months. What about the business owner who temporarily has a lower credit score because of some unexpected medical bills? One need not look too far to find a small business that has struggled in the aftermath of a personal or natural disaster. The small-business owner needs an advocate who will listen and can take their comeback story into account.
Technology has changed the way borrowers participate in the process. Google has made a huge impact on the SBA lending business. Mortgage brokers are seeing more of their leads come from online traffic and, with that, comes more competition. The small-business owner can shop around before their first point of contact with a broker. So, it’s more necessary than ever to have an informative website and positive online reviews. It also helps if your website is optimized, so it can be found on the first couple pages of the major search engines. You can expect to compete with many other brokers for new customers, who will have their pick of choices via a simple internet search.
Borrowers have more choices today and greater demands, but there’s opportunity for you to outpace your competition. Borrowers are looking for certainty to close. They are looking for help in navigating through a mass of information, not all of which is accurate.
The process can be overwhelming to a first-time borrower. Mortgage brokers who truly understand the process are more valuable than ever. To provide value, however, you need to take specific steps that will help you manage the borrower’s expectations and ultimately help you secure SBA financing for more small-business owners.
First, specialize in SBA lending, which is all about education. There is a set of guidelines lenders must follow, but it’s 410 pages long and SBA makes changes every year. On top of that, it’s riddled with gray areas that require experience to interpret. The broker’s value comes through knowledge of the products.
Second, work only with direct lenders who specialize in SBA financing. It makes sense to work with lenders that believe in the same values that your borrowers demand: speed, certainty and reliability. Nonbank lenders, in particular, are great to work with because their interests are aligned with brokers. They don’t make money if they don’t close loans.
Third, go back to the basics. Provide personalized customer service that establishes reasonable expectations. Answer phone calls and share expert advice. Too many brokers have forgotten about these fundamental principles.
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The most successful commercial mortgage brokers do these things with SBA loans. This program is a different breed and you must truly understand it to be successful. This alone will differentiate a broker from most of their competitors. SBA lending is riddled with land mines at every turn. Small-business owners can greatly benefit from a skilled broker who can walk them through the SBA battlefield and secure financing for what may be the largest transaction of their life.