Pub. 10 2020-2021 Issue 4

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org 16 In addition, an institution cannot pass a known loss on to the government, so banks or credit unions considering re- financing existing debts on the books now will need to act quickly before financials demonstrate severe losses. For existing loans to be eligible for SBA refinancing, they must be on what the SBA considers “unreasonable terms,” which can include the following: • Having an interest rate over maximums for the SBA pro - gram used • Having a balloon payment — a short-term note • Having an aggressive pay down schedule or being over-collateralized • Using debt to finance a change of ownership (where the new owner will own 100%). To be eligible for SBA refinancing, the application must also meet a requirement that it will result in a 10% improve - ment (for term loans) in cash flow for debt service, which Wear said is generally reasonably easy to meet, given the SBA’s longer terms. SBA 7(a) guaranty amounts and fees are graduated based on the loan term and dollar amount, and the SBA does take a “haircut” on the lender rate for servicing, Wear said. Never - theless, in his experience as an SBA lender, he never had an issue with internal pricing models or return on investment goals related to SBA lending. However, as noted earlier, Wear said lenders might have a learning curve. SBA is very oriented to its Standard Oper - ating Procedures and it can be a very paperwork-heavy pro - cess. (By the way, the SBA recently announced updates to the SBA SOP for 7(a) programs that will be effective Oct. 1. The current SOP 50 10 5 (K) remains in effect until then.) Tech - nology that automates the application, document-gathering, and submission to E-Tran, can help — as it did with the PPP. Here are a few other tips Wear provided for SBA lending: • Use your local SBA office and seek out private SBA ex - perts (often former SBA lenders themselves). • Have a dedicated SBA expert in-house. • Practice makes perfect. • Communicate with the borrower up front about what in- formation is needed and why. • Make use of in-house document monitoring to ensure proper monitoring of SBA loans. “Not doing on-site checks until it’s too late or not updating financials are two popular reasons SBA reduces or even denies claims,” Wear said. Other, lesser-known SBA lending programs that financial institutions can explore to help businesses in their commu- nities include SBAExpress, CapLines, and 504 loans. SBAExpress has a maximum loan size of $350,000. How - ever, that has been temporarily lifted to $1 million under the CARES Act and has a lower guaranty than regular 7(a) loans, so it has lower guaranty fees. But they typically are approved faster, and the institution can use their own closing documents. continued from the previous page CapLines provides revolving credit lines that can be used for contracts or working capital for inventory, for example. Loans can be up to $5 million, up to 10 years, and have a standard guaranty of 75% to 85%. “These are great for large contracts for your small contractors,” Wear said. “They offer nice extended loan terms for builders and having this facility might even reduce bonding costs.” For borrowers looking for real estate or large equipment loans, certified development companies can offer SBA 504 loans, which provide long-term fixed-rate loans, typically $250,000 to $5 million. According to Wear, a final option for lenders to consider as they look for government guarantees on loans is the U.S. Department of Agriculture. It offers loan guarantees of up to 90% through its Business and Industry Loan Program for borrowers in rural areas. n O ther, lesser-known SBA lending programs that financial institutions can explore to help businesses in their communities include SBAExpress, CapLines, and 504 loans.