Why SBA Loan Production is Down
I am a big fan of SBA loans. I’ve originated many in the last 20 years as a business broker and former commercial banker. Without these loans, my “main street” business clients would not have been able to sell their businesses to new owners or expand.
We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today the problem is different. Rates are low yet liquidity is even lower for banks.
Here’s why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheets. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy”. In many cases, problem loans are not being addressed because doing so would cause write-downs which erode bank capital. The regulators know that stepping softly is key to rebuilding the economy and the banking system. Banks are encouraged to term out loans for longer than normal periods to avoid losses and business closures.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet have made them even more cautious than normal. They are playing a waiting game…. waiting for things to get better. But it’s a Catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back too.
So okay but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks?
Here’s my opinion based on experience and conversation with bankers, regulators and debt buyers.
Banks:
don't have experienced staff in place that understands the program
don't want to learn the program because what you don’t understand, you fear
think its too much work to be involved in the program
know that even if they get the SBA loan done properly there is really no guarantee that the bank will be able to call on the SBA guarantee in the future. The loan must be properly underwritten and serviced in order to maintain the guaranty.
So, it’s going to be awhile before the credit market loosens. In the mean time, buyers and sellers of businesses have to get more creative and flexible. This means sellers will have to self-finance more of the transaction. That’s good for buyers but not so good for sellers that want to exit the business and not worry about it any more.
In some cases, the business owner may NOT be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide micro loans to each other and take the banks out of the picture. Now wouldn’t that be something?
We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today the problem is different. Rates are low yet liquidity is even lower for banks.
Here’s why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheets. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy”. In many cases, problem loans are not being addressed because doing so would cause write-downs which erode bank capital. The regulators know that stepping softly is key to rebuilding the economy and the banking system. Banks are encouraged to term out loans for longer than normal periods to avoid losses and business closures.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet have made them even more cautious than normal. They are playing a waiting game…. waiting for things to get better. But it’s a Catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back too.
So okay but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks?
Here’s my opinion based on experience and conversation with bankers, regulators and debt buyers.
Banks:
don't have experienced staff in place that understands the program
don't want to learn the program because what you don’t understand, you fear
think its too much work to be involved in the program
know that even if they get the SBA loan done properly there is really no guarantee that the bank will be able to call on the SBA guarantee in the future. The loan must be properly underwritten and serviced in order to maintain the guaranty.
So, it’s going to be awhile before the credit market loosens. In the mean time, buyers and sellers of businesses have to get more creative and flexible. This means sellers will have to self-finance more of the transaction. That’s good for buyers but not so good for sellers that want to exit the business and not worry about it any more.
In some cases, the business owner may NOT be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide micro loans to each other and take the banks out of the picture. Now wouldn’t that be something?
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