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Achieve Capital's 10 Tips for Successful 7a Lending

By BILL PERRY

SBA Loans Conquered:

SBA 7a loans can be profitable, that is clear. But as we all know, these loans are not simple or easy to process. We thought it was important to have a discussion about SBA loans so we caught up with Steve Terhaar, Managing Member and Founder of Achieve Capital to ask him his advice on how to conquer the SBA 7a loan. Steve terhaar shares with you 10 tips to enhance your SBA 7a lending platform: # 1. have Goals and a Strategy SBA 7a lending can be quite a daunting task. Many bankers have struggled through one or two loans, and decided it isn't worth the extra work and stress. This comes from doing 7a lending without goals and a strategy. It is not only painful, it is dangerous due to the fact that that the banker has probably made beginner's errors

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that will cost them a portion or all guaranty if the loan ever goes bad. Successful SBA 7a lending must be driven by the financial goals of the bank. Fee income from selling the loans on the secondary market is one of the primary financial goals that many banks have. Other possible goals are liquidity, safe loan portfolio growth, and refinancing of existing bank portfolio loans into 7a loans. (Yes, you can refinance your own loans into an SBA 7a guaranteed loan). Once you have your financial goals now you can strategize how you are going to originate and process the 7a loans to meet your goals. A low risk entrance strategy in 7a lending can be setting SBA 7a origination goals for your commercial lenders and hiring a SBA lender service provider like Achieve Capital to train your staff and assist in the processing, and SBA compliance of each loan.

Michigan Banker

# 2. Early Communication of the Benefits and Costs to the Borrower Two major objections to SBA 7a loans from borrowers are the large guaranty fee, 3 to 3.5% of the guaranteed portion of the loan (sorry, SBA fee waivers ended in 2010), and the requirement to pledge personal collateral if the loan is less than 100% collateralized. The best course of action is to inform the borrower upfront of these and other possible items that may be objectionable to the borrower. BUT, the borrowers also need to know the many advantages of SBA 7a loans -higher advance rates, longer terms, no balloons, etc. In 12 years of SBA lending, I have found that the most effective way to communicate the benefits and costs to a borrower is an "early in the process" soft proposal/term sheet. If the borrower sees upfront that the benefits outweigh the costs, the loan process goes much smoother.

and regulations to the client's advantage. I remember one client that I assisted a few years ago. The client was told by their existing bank that my proposed SBA loan structure could not be done. The existing banker insisted that the SBA would not allow the rules to be interpreted to give the borrower a 120% LTV loan on their building with no additional collateral. The borrower happened to be a CPA firm, so when we closed on the financing (at 120% LTV) the other bank was speechless, and we had just won over a great referral source. # 5. Checklists! ­ Use them The best way to communicate information requirements to the borrower and to close on a compliant SBA loan is to prepare checklists that are specific to the needs of the loan transaction. It takes extra time to customize checklists to a specific transaction but it pays huge dividends in the form of expediting the process, client satisfaction, and meeting all the loan requirements before funding your loan. At Achieve Capital, we customize the checklists for our bank clients, their customers, and manage the SBA approval and closing processes with checklists.

# 3. Use SBA 7a Lending Lower the Risk of Your Loan portfolio Banks that don't utilize SBA 7a lending on a regular basis many times take on too much risk with their conventional commercial loan Steve Terhaar, founder and managproducts. Some of these risks are; ing member of Achieve Capital has collateral gaps, low net worth, pro- 22 years of commercial lending experience, and the past 12 years jection-based debt repayment, bor- has specialized in SBA lending. # 6. Get an Early Start on rower's with a high percentage of Closing to Lower the pressure revenues from a few customers, turnaround refinances, The SBA approval on a 7a loan is a document called the high risk industries, business acquisition/transition SBA Authorization. It authorizes the lender to close the financing, highly leveraged transactions, export financloan with the SBA guarantee, and in bold print it states ing, to name a few. Why take these risks on a conventionthat the lender has the sole responsibility for closing the al basis when a 75% SBA guarantee can allow you to proloan in accordance with the terms stated on the tect your commercial loan portfolio from sizable losses? Authorization. Many times a SBA approval comes slower You can utilize a 7a loan for a couple years until the borthan anticipated, the loan officer feels responsible for the rower becomes a lower risk and then refinance it with a slow approval, the borrower pushes to close ASAP, and conventional loan. Statistics show that the SBA pays on there may be a seller or broker involved who is threaten95% of the guarantee dollars it is requested to fund. Count ing to pull the deal off the table. With these circumstances on it for your portfolio. it is easy to get pressured into compromising or miss details on the Authorization. Missed or compromised # 4. Look at the SBA Rules and Regulations as items may cause the lender to get less of a guaranty if the positives Rather than Negatives loan goes into default. The key to lowering the pressure Tax accountants and CPAs assist our clients with strateon closing is to start on closing requirements as soon as gies that lower income and property taxes. Business attorthe loan is submitted to the SBA for approval. Get a preneys assist our clients in navigating laws and carve out closing checklist to the borrower, start on third party niches based on government policies. In the same way reports, and move with confidence that the SBA will bankers can assist their clients in utilizing the SBA rules approve the loan.

February 2011

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Jim Simone, EVP, Bank of Birmingham, Tim Droege, President, NOVO Motor Acoustic Systems, and Steve Terhaar, Achieve Capital meeting at Bank of Birmingham to close on a SBA 7a loan for NOVO Motor Acoustic Systems

# 7. tracking Money in & Money Out Many of us have found the new body scanners at the airport as personally intrusive. We can get a similar feeling as we gather the required information to proof on the borrower's equity injection funds and disbursements on the loan. The SBA is explicit on the documentation required for injection and disbursements, and for good reasons, as there is a high potential for fraud. The key to tracking funds in and out is to have formatted spreadsheets where you can write the details of sources and uses and attach the documents that prove the details on the spreadsheets. Without details written on a spreadsheet, it is very difficult and time consuming to review the injection and disbursements at a later date. # 8. Start the 10 tab Soon After Closing If a SBA 7a loan goes into payment default and the lender needs to request the payment guarantee from the SBA then the lender must submit a 10 section guaranty purchase request package nicknamed the "The 10 Tab". It is recommended by the SBA that the 10 Tab be started by the lender soon after closing. The lender can get the 10 Tab about 60% complete post closing, the other 40% is completed post default. The habit of starting the 10 Tab soon after closing is also an opportunity for a post close audit of the file. # 9. Document Servicing Actions Service actions on an SBA 7a loan primarily occur when a borrower requests a change in terms such as a collateral release, lower payments or sale of the business with the 7a loan being assumed by the new owner. In recent years the

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SBA has shifted the authority to the lender for many of the post closing servicing actions. This has given the lender more flexibility but it also gives the lender more potential liability for errors in judgment that can be costly if the loan goes into default. The lender is required to make prudent decisions. The key is to document the file with written detail of your decision rather than to rely on your memory of the event. # 10. Site visits Required on Delinquent 7a Loans On SBA 7a loans, the lender must perform a site visit within 15 days of an event that would cause the loan to be transferred to liquidation status or within 60 days of a payment default. The site visit should document the lender's efforts to protect the lender/SBA's interest in the collateral, including a comprehensive inventory of collateral. This requirement creeps up quickly on a banker. You call on your past due payments, you get bogus promises to pay, and before you realize it the loan is 45 days past due, and you have only 15 more days to make a site visit. The key is to meet with the customer at their place of business early in a Past Due situation and document your file on the visit. With the right strategy, SBA 7a lending can make a significant impact on the financial goals of your bank. We hope that these 10 tips make it easier to conquer the SBA loan and assist you with implementing a low cost, low risk 7a lending strategy. For more information on SBA 7a lending contact Steve Terhaar at [email protected], or (734) 317-3900.

Michigan Banker

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