May 3, 2017
By Chris Hurn
C-Suite Wednesday: Seven Moves the New SBA Administrator Can Make to Smackdown Tepid Economic Growth While Championing Small Businesses
If you were a child or had children in the past 30 years or so, there is a fair chance that you have at least a passing knowledge of the sports entertainment behemoth that has become World Wrestling Entertainment (WWE), formerly the World Wrestling Federation (WWF). Touting the sport’s biggest names, like Hulk Hogan and Dwayne “The Rock” Johnson, the corporation has spent years laying “the smackdown” for fans across the country (and world). A major factor of their success is former CEO and president, Linda McMahon, whom the U.S. Senate recently confirmed as leader of the Small Business Administration — this is where our ears perk.
With a new leader of the SBA, we think now is the perfect opportunity to let McMahon in on a few ways that she can improve and strengthen the SBA 504, a loan program that both we and thousands of companies across the U.S. consider an invaluable flagship program.
- Data Collection:
The Agency needs much better data collection so SBA 504 loans can be readily securitized. One cannot ignore the healthy secondary market for the other main loan program of the SBA, the 7(a). A void has existed for SBA 504 loans long enough. Wall Street securitizers need accurate, total write-off data on the SBA 504 second lien loans and accurate, total default-level (and write-off) data on all SBA 504 first lien loans. This needs to become a reporting requirement for third-party lenders to participate in the program. Transparency also needs to become the name of the game for SBA 504 performance history data collection, not something that only FOIA requests can partially unlock.
- 25-Year Amortization: It’s time for a 25-year amortization on the permanent SBA 504 second lien loans to match the terms for most first-lien loans in the SBA 504 loan product. With a 34-plus-year history of uninterrupted, monthly bond sales in SBA 504 permanent second lien loans at 20-year amortizations, the market should welcome this slight tweak. This is a common-sense effort to make the two loans match and help further the competitiveness of the SBA 504 loan program.
- Faster Approvals: There needs to be faster approval times at the SBA’s centralized processing center (SLPC). It’s 2017 – for the program to remain competitive in today’s commercial loan marketplace, approvals cannot take weeks; they must issue approvals in mere days. The standard should be three to four business days (as was once the case shortly after SLPC was first set up). If online lenders can approve loans in minutes, it’s time the SBA at least get back to approving loans in days.
- Upgrade Underwriting: Community Development Companies (CDCs) – the eyes and ears for the SBA on SBA 504 projects–need to upgrade their underwriting capabilities to match the current realities of loan applicants. “Complicated” and/or large SBA 504 loan projects shouldn’t get turned down, especially when they eventually get approved as conventional loans elsewhere – something that has occurred at least seven times in just the past nine months with my firm. CDCs need to let go of the headaches that occurred in 2008/2009 and understand the realities of today rather than dwelling on the difficulties of a once-every-three-generations financial recession. Additionally, thanks to the lifting of the “personal resources test” a few years ago that limited better credit borrowers from pursuing SBA 504 loans in years past, CDCs also need to understand that better credit borrowers are choosing SBA 504 and their underwriting capabilities need to reflect this.
- Statutory Changes: It’s time to make a fundamental, statutory change in the SBA loan programs to address the overlap in the two main programs, 7(a) and 504. $500,000 or higher amount real-estate-only projects need to be targeted to go SBA 504. There continues to be too much premium-chasing in real-estate-only SBA 7(a) loans. An estimated one-third of all SBA 7(a) loans over $500,000 in loan amounts are the result of high secondary market premium chasers. These loans are predicated on convincing a small business borrower to take a floating rate on their fixed asset (commercial real estate) loan. This is how a lender maximizes their secondary market premiums but must stop if the Agency truly has the best interests of America’s small businesses at heart. The status quo has gone on long enough, and in the current rising rate environment, this should move up the priority list. When real-estate-only loans above $500,000 are done in the 7(a) program, a detailed explanation of why it wasn’t done as part of a 504 loan project ought to be required from lenders.
- Consider Small Working Capital Proceeds: It is time to consider small working capital proceeds for the SBA 504 loan program, when tied to job creation. There has been some resistance to such a proposal, as it rests largely on the ill-conceived notion that this would not help create or retain jobs – the foundation upon which the SBA 504 loan program exists. However, nearly any business owner will readily point out how foolish that argument is. The door to this proposal has already been cracked with the SBA 504 loan program’s small “cash-out” availability with its new permanent refinancing provisions. Caps on the amount of working capital allowed, based on loan size, is one way to accomplish this. Another is simply using the precedent set by the new SBA 504 refinance loan regs: up to 25% of the total loan amount.
- Champion Loan Programs: The Agency needs a strong champion to promote its loan programs. SBA is one of the most effective federal agencies in terms of its impact on the US economy, per budgetary dollar. Its critics fail to see the bigger picture, so this message needs to be on repeat – not put on the back burners while shifting the focus to changing the names of its loan programs. The rise of “marketplace leading” and of other innovative/alternative lenders stand in stark contrast to the decline of community banking. Total numbers of banks are down spectacularly since the Great Recession. Access to capital starts with involving more lenders while welcoming new entrants who are ready to embrace and carry the flag of SBA loan programs. SBA has proved itself as anything but a “lender of last resort” over the past turbulent decade. Applicants are increasingly choosing SBA loan programs, especially the 504, because of better terms and conditions than those found from conventional lenders. This is the new reality. The Administrator needs to fully embrace this and bring more into the fold to help shape the perception in entrepreneurial corners that SBA 504 loans can effectively compete against ordinary, conventional bank loans.
I am personally excited to see how Linda McMahon handles her new, vital position as leader of the SBA. She is set to impact the face of not only the SBA, but small businesses across the country — hopefully for the better by heeding my advice above. Regardless of her next moves, Fountainhead Commercial Capital will be here for our clients each step of the way, working within the parameters to always have the backs of America’s small businesses.
Wishing current and future prosperity,
Founder/CEO of Fountainhead Commercial Capital
Editor Note: While I respect Chris and some of these are great ideas e.g. better data collection, faster processing and 25-year terms for 504 loans, please note these are his opinions, not mine! — Bob Coleman