Q: How can financial institutions achieve an ROA exceeding 3% from small business loans?
A: By leveraging the Small Business Administration (SBA) lending programs, financial institutions can achieve an ROA exceeding 3%.
Q: What is the Small Business Administration (SBA)?
A: Established on July 30, 1953, by the Eisenhower administration, the U.S. Small Business Administration aims to support small businesses and entrepreneurs toward American prosperity. The SBA is known for providing capital, contracts, and counseling (the 3 C’s). Initially considered cumbersome, SBA programs have been streamlined over the years, making them simple and beneficial for both financial institutions and business customers.
Q: What are the barriers and benefits of SBA programs for financial institutions?
A: Barriers include perceived complexity, time consumption, staffing challenges, and training needs. Benefits include alternative funding mechanisms, lower down payments, longer terms, and reduced risk with up to a 90% loan guarantee. SBA loan products include 504, 7(a), and micro-loans.
Q: How can financial institutions overcome SBA lending barriers and what are the benefits?
A: Institutions can utilize resources such as the Florida Bankers Association, SBA referral networks, institutional guidance, and established assistance programs. Additionally, lender service providers like SBA Works can help institutions who lack time, expertise, or an operational foundation for SBA programs.
Institutions should consider SBA programs for their guarantee of repayment and increased earnings, which provide an alternative to traditional commercial and small business lending.
SBA loans can provide up to a 90% guarantee to reduce risk. The SBA 7(a) program offers multiple income sources including servicing rights, fee income, and general interest income.
Additionally, many institutions choose to sell the guaranteed portion of the loan on the secondary market, which helps generate a higher ROA.
Q: Is there an illustration of the benefits of SBA loans?
A: With a perfected SBA 7(a) loan of $1,500,000 for the purchase of commercial real estate, an institution can sell the guaranteed portion for a 10% premium and earn a servicing fee, resulting in substantial gross earnings and a high ROA. The ROA for Year 1 is 6.87%.
Q: How can institutions get more information about SBA programs?
A: With foreseeable shifts in rates, competition, and product differentiation, now is an opportune time for institutions to leverage the successful SBA program. Institutions can contact the Florida Bankers Association or SBA Works for additional information regarding SBA programs.