Noah Grayson, Author at Scotsman Guide

The SBA’s Win-Win Proposition

Noah Grayson — Thu, 01 Jun 2023 23:06:00 +0000

It is no secret that rising interest rates have given people cause for concern of late. Borrowers seeking real estate, equipment or business financing are often confronting interest rates not seen in the past decade while those currently in adjustable-rate loans are contending with regularly rising payments.

Many commercial mortgage brokers have seen their pipelines dry up as borrowers sit on the sidelines, showing apprehension about new financing in an uncertain economic environment. Lenders too are not immune to the consequences of market conditions, as bank and nonbank lenders alike have had to tighten program guidelines and even lay off employees due to capital concerns resulting from a lack of loan demand.

“Since guarantee fees for loans up to $1 million have been drastically reduced, there is more room for a broker to earn a fee.”

Many businesses, however, are faring well despite the economic volatility. Government loans, including the 7(a) program from the U.S. Small Business Administration (SBA), give borrowers access to sensible capital. And recent changes to this program have made SBA 7(a) lending more affordable than ever, creating opportunity for mortgage brokers to build a significant revenue stream.

Nuts and bolts

SBA 7(a) loan proceeds can be used for most business purposes, including the purchase, refinance, renovation or ground-up construction of commercial real estate. The property owner’s business must occupy at least 51% of the space, or 60% for new construction projects. These loans can also be used for non-real estate business needs such as working capital, equipment, inventory, partnership buyouts, debt consolidation, business or franchise purchases, leasehold improvements, expansions and even startup expenses.

Loan sizes for the 7(a) program usually range from $25,000 to $5 million. It is not always a requirement for real estate or hard collateral to be included. These loans are provided by SBA-approved lenders, which include many banks and a select group of nonbank lenders. The smallest SBA 7(a) loan amounts are guaranteed up to 85%, meaning that the lender is reimbursed for a large portion if the borrower defaults — assuming that the lender followed the required standard operating procedures when originating and funding the loan.

To compensate the U.S. government for providing a guarantee on SBA loans, the borrower is charged a fee on the guaranteed portion of their loan at closing. This fee can be significant and equal up to 3.75% of the guaranteed portion of the loan.

The guarantee fees charged to SBA borrowers are reasonable, however, considering the favorable loan terms they can access through the program. Guarantee fees on SBA 7(a) loans are almost always financed into the loan proceeds. The borrower won’t pay out of pocket at closing but over time as part of their ongoing principal and interest payments (which are amortized out as long as 25 years, depending on the loan size and the collateral involved).

Guarantee fee waivers

Interest rates for 7(a) loans are often adjustable to a set margin above the prime rate and adjust on a set schedule. This means that in a rising interest rate environment, a borrower who takes out a new quarterly adjustable 7(a) loan could experience an elevated cost of borrowing when compared to someone who took out a similar loan in prior years.

The combination of a higher adjustable rate and a larger guarantee fee could make a 7(a) loan cost-prohibitive to many borrowers. In October 2022, to help lessen the impact of recent interest rate hikes, the SBA implemented significant reductions to the guarantee fees that are passed on to borrowers of 7(a) loans. The changes are effective through September 2023.

For loans with maturities that exceed 12 months, these changes include:

For loans of $500,000 or less, the SBA removed the guarantee fee altogether. There was a previous upfront fee waiver on loans of $350,000 or less.
For loan sizes up to $700,000, the fee was reduced from 2.77% of the guaranteed portion of the loan to 0.55%.
For loan sizes up to $1 million, the fee was trimmed from 3.27% of the guaranteed portion of the loan to 1.05%.

Prior to these recent changes, a borrower taking out a 7(a) loan for $500,000 would have been charged a guarantee fee of $10,387.50. That same borrower will now be charged nothing. A borrower who previously took out a $1 million loan would have been charged a fee of $24,525. Under the new structure, however, they’ll owe $7,875 — good for savings of $16,650.

Additionally, borrowers who work with a direct SBA lender can now receive financing up to $500,000 without being charged any additional guarantee or origination fees. Direct SBA lenders may charge an origination fee of up to $2,500, but charges above that amount are uncommon.

Brokerage fees

The recent SBA fee waivers have also created a great opportunity for commercial mortgage brokers to earn more significant income on SBA 7(a) loans. Prior to the recent guarantee fee reduction, it was difficult for an SBA loan broker or intermediary to charge additional fees to the borrower. It would often become prohibitive for the borrower to proceed with the financing, given the already sizable SBA guarantee fee.

Now, since guarantee fees for loans up to $1 million have been drastically reduced, there is more room for a broker to earn a fee. Many SBA lenders will pay the referring or originating broker a fee that is priced into the loan’s interest rate. This fee (depending on the lender you work with) can range from 0.5% all the way up to 3% for experienced and high-volume SBA intermediaries. Any broker looking to earn a fee from the borrower — in addition to the fee they’re earning from the lender — should first confirm whether this is acceptable to the lender.

Any fees charged are legally required to be disclosed to the borrower on SBA Form 159. The lender will require this document to be completed and signed by the broker and borrower prior to closing, and it will be submitted to the SBA after closing. Charging a fee to an SBA borrower without reporting it can result in financial penalties and, in some cases, criminal prosecution.

Changes on horizon

Since last year’s policy change, the SBA has been working to update its standard operating procedures. This is designed to make its financing accessible and affordable to even more borrowers.

Some of the changes being considered include allowing more nonbank lenders to participate in the SBA lending program. This number is currently capped at 14. Additionally, the agency is looking at updates to business affiliation rules that would make it easier for larger and/or more complexly structured companies to qualify.

Earlier this year, potential revisions to standard operating procedures were being reviewed by the federal government, and all of the proposed rule changes have not yet been finalized. Nonetheless, borrowers can still take advantage of the guarantee fee waivers currently in place to better access growth capital and offset rising interest rates. And mortgage brokers can leverage the recent changes to earn sizable fees while still giving their clients access to affordable and flexible small-business financing. ●

The post The SBA’s Win-Win Proposition appeared first on Scotsman Guide.

Funding In A Flash

Noah Grayson — Thu, 01 Dec 2022 09:00:00 +0000

The U.S. Small Business Administration (SBA) Express financing program is often thought of as one of the unicorns of government-guaranteed small-business lending. Many find it hard to believe the little-known and inexpensive program even exists, or they believe it’s too good to be true.

Despite the SBA Express program having a sterling record, it is not heavily promoted in the commercial real estate marketplace, and few SBA lenders and brokers specialize in the program. There are some reasons why SBA Express financing is not a preferred product for many lenders, brokers and other mortgage professionals, but there also are many reasons why it should be.

For Express loan sizes of less than $350,000, the SBA does not require that the lender underwrite financial statements or tax returns.

The SBA Express program is actually a subset of the more widely known 7(a) program. Like other SBA 7(a) options, Express loan proceeds can be used for almost any small-business need, including working capital, equipment, the purchase of commercial real estate, the refinancing of debt, or other expansion and growth needs.

The 7(a) Express loan can cover more needs than the recently created 504 Express program, which is mainly used to buy equipment or property, or to enhance or develop an existing property. One of the best features of the 7(a) Express loan is that it can be approved for funding in hours or days, versus weeks or even months for other SBA programs.

Smaller and faster

The SBA Express program allows for financing of loans of $500,000 or less. The regular SBA 7(a) program enables funding up to $5 million. SBA Express loans have financing terms of up to 25 years when commercial real estate collateral is involved, although the program includes a three-year prepayment penalty when the amortization period is at least 15 years.

Business owners seeking SBA Express financing may be eligible for financing of up to $500,000 for most business needs. And many SBA Express lenders focus on loans of less than $50,000. These loans can be priced in the range of the prime rate plus 6.5%. They include a standard monthly repayment and same-day funding may be possible.

What makes an SBA Express loan so much faster than a standard 7(a) loan is that for Express loan sizes of less than $350,000, the SBA does not require that the lender underwrite financial statements or tax returns. Many Express loans can be funded with just a handful of required SBA forms completed by the borrower.

This paperwork includes Form 413 (personal financial statement), Form 1919 (borrower information form), a few additional forms and a quick verification with the IRS that tax returns have been filed. Additionally, for SBA Express loan sizes of less than $25,000, the SBA does not require that any collateral be secured, enabling same-day funding via an experienced SBA lender.

Extensive rules

Loans funded by an SBA-approved lender under the standard 7(a) program are guaranteed by the U.S. government for up to 85% of the total amount financed. This means that if the borrower defaults on the loan (and assuming the lender followed all required protocols when making the loan), the SBA will reimburse the lender for up to 85% of the funded amount. This guarantee drops to 75% for standard 7(a) loan sizes that exceed $150,000.

With Express loans, however, the SBA only guarantees up to 50% of the loan size, so if the borrower defaults, the lender will receive a much smaller reimbursement. The interest rate that a lender can charge for an SBA Express loan is the same as for a regular 7(a) loan — up to prime plus 6.5% — but the administrative and infrastructure demands needed to process and fund a high volume of loans for less than $500,000 is often too demanding to be worth many lenders’ time and effort.

Again, on a loan size of $25,000 or more, the SBA requires collateral. A loan that is more than $350,000 in size requires full underwriting using tax returns and financial statements, so the streamlined benefits deteriorate as the loan sizes get larger.

Many SBA lenders will consider that if they are going to spend the time and the resources on a small-balance loan, they might as well run it through the standard 7(a) program and get the government guarantee of up to 85% for better protection in the event of default. After all, funding one fully collateralized $1 million loan with an 85% guarantee takes fewer resources and is less risky than funding 40 uncollateralized loans for $25,000 with 50% guarantees.

Experienced lenders

As a result of these requirements, lenders that offer SBA Express loans (especially for sizes below $25,000) are those that have the framework, technology, staff and experience to process a high volume of loans quickly and efficiently. Additionally, due to the reduced guarantee of 50%, the lenders that undertake the Express program also tend to have a strong balance sheet, a good standing with the SBA (usually preferred lender status), and a track record of low defaults and favorable portfolio performance.

Notably, the SBA has a “credit elsewhere” rule, which basically means that a borrower who is applying for SBA financing of any kind is doing so because a conventional, non-SBA financing option is unavailable. Also, because loans may not be collateralized or fully reimbursed in the event of default, SBA Express financing may not be available to businesses and business owners with a less-than-prime profile.

SBA Express lenders may only conduct underwriting based on the personal credit score and experience of the business owner, the operating history and repayment history of the business, and the result of a small-business score provided by the SBA. Because of these requirements, qualifying parameters may be more conservative and include the following:

A business credit score that is 700 or higher
An operating history of at least two years
Filing of all required tax returns
No history of late payments, defaults, bankruptcies or foreclosures

Some SBA lenders may consider more liberal qualifying parameters for their SBA Express programs, but additional collateral or security for these loans is likely to be required. Additionally, it is important when obtaining any SBA financing to work with a preferred lender, which is the highest status level offered to a lender by the SBA. It enables the lender to directly approve SBA-eligible transactions. A lender that does not have preferred status must submit transactions directly to the SBA for approval, which can add significant time to the financing process and, in some cases, cause additional documentation or collateral to be required.

●●●

SBA Express financing is an accessible option for borrowers who are seeking fast funding at affordable and competitive terms. Express programs tend not to be as abundant as standard SBA 7(a) loans due to the reduced guarantee offered by the agency, as well as the logistical requirements and experience needed by the participating SBA Express lender. But it is still a great tool for mortgage brokers to help small businesses that are seeking quick cash for their operations. ●

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Avoid the Short-Term Trap

Noah Grayson — Fri, 15 Nov 2019 10:59:00 +0000

Sometimes it seems your only choices in funding a commercial real estate deal lead to a short-term trap. You have the option of gambling on an adjustable interest rate, or going for a fixed-rate loan that resets with a new interest rate after a few years. Borrowers who need to close quickly or have special challenges often needlessly choose by default a higher-cost bridge loan, even if they need permanent financing.

But your clients don’t have to settle for anything less than the security of a 30-year fixed rate. Permanent stated- income lenders are offering long-term commercial mortgages for hard-to-fund borrowers and projects. These loans can ultimately save significant money for your clients.

An adjustable, short-term commercial mortgage has its uses. It can be a great vehicle to keep costs down during periods of low interest rates. Many investors choose an adjustable rate when planning a near-term property sale or permanent refinance. In these cases, short-term bridge financing with a 12- to 36-month expiration date is a viable option, provided that the property can be sold quickly. Commercial properties, however, often do not sell quickly.

An adjustable-rate mortgage also can sometimes be a borrower’s only option due to eligibility issues. The U.S. Small Business Administration (SBA), for example, presents one of the most cost-effective financing vehicles for business owners, but the rates negotiated between the lender and the borrower are subject to guidelines established by the agency. A quarterly adjustable loan is often the only choice available. Some SBA lenders will offer long-term fixed commercial mortgages up to a maximum of 25 years, but qualifying parameters tend to be stringent and may not allow the proceeds to be used for working capital, inventory or other needed items.

For investors who renovate property and lease it, the challenge is to find tenants and bring occupancy up to a level required by permanent lenders. Owners, however, may be unable to secure the needed tenants in time or cannot find a way out of a high-cost temporary mortgage. Even for those fortunate or experienced enough to execute a project perfectly and refinance out of a short-term loan, rarely will the permanent mortgage carry a fixed rate for the life of the loan.

Financing trap

There is no lack of permanent commercial mortgages in the marketplace, but what is consistent about most commercial mortgages is the short-term structure of the loan. Permanent lenders will commonly offer a 25- or 30-year amortizing loan, but the fixed-rate period offered by most lenders is still relatively short.

Banks, for example, dangle long-term fixed commercial mort- gages. Long-term bank loans may seem like a good option if you can qualify for one. These loans, however, commonly include balloon payments or loan-structure reset periods at the five-year mark, forcing the borrower to refinance or extend the loan at a higher rate.

Likewise, the fixed terms offered by most nonbanks usually isn’t adequate. Nonbank lenders commonly offer three-, five- or seven-year fixed-rate loans, but many business owners and investors intend to hold a property for longer than seven years. To find longer fixed terms, you have to know where to look. Some nonbank commercial real estate lenders will offer 15- or 25-year fixed mortgages, but their rates are prohibitively high and are better used for longer transitional purposes. Despite that, some nonbank stated-income lenders have stepped up to offer viable long-term loans, including 30-year fixed mortgages, at reasonable rates.

A stated-income commercial mortgage is simply a loan that doesn’t require a borrower to produce tax returns, financial statements or other documentation to verify personal or business income. Two general comments should be made upfront about these products. First, not all stated-income lenders offer long-term fixed loans. Second, permanent stated-income lenders have the ability to fund many of the same challenging borrowers and property types as bridge lenders, but they are a different breed of lender.

Different animals

Bridge lenders often require minimal documentation, but their loans can differ significantly in other ways. They tend to focus on the value of the asset, are uncomfortable with higher leverage levels and want to see a viable exit strategy. Some bridge lenders will require income documentation and some won’t, but all offer short-term loans that essentially “bridge” a borrower from a less favorable situation to a more favorable one. The permanent stated-income loan offers a long-term solution for the borrower.

Long-term stated-income loans tend to carry higher interest rates than other forms of permanent financing. The rate spread can be as much as 100 to 500 basis points above the conforming loan rate with a traditional lender. The advantage is that a long-term stated-income loan provides security over time, requires minimal documentation and can be closed relatively quickly.

The lender is mostly evaluating the underlying asset and its potential for generating income over the long term. The underwriter also will usually consider the borrower’s credit score, although stated-income lenders tend to be more flexible in this regard than banks. With stated- income loans, it’s also possible to finance projects for credit-challenged borrowers or projects that don’t strictly conform to guidelines.

In some cases, for example, a borrower’s income doesn’t meet the debt-service-coverage ratio or debt-to-income requirements of a bank or conforming lender. A borrower who has a credit score or cash flow below bankable guidelines is a good candidate for a stated- income loan. A borrower who needs permanent financing for a challenging property type, such as a bar or restaurant, also would be a good candidate. Permanent stated-income lenders tend to be more common for small-balance commercial real estate loans of less than $5 million. These loans, however, are not suitable for raw-land or construction projects, or for properties in transition. Fast and flexible

A widely held perception is that permanent mortgage lenders always have rigorous underwriting processes, but this is not always the case. Those who fail to do their research and jump into a bridge loan to avoid red tape may end up paying unnecessary loan costs. A permanent stated-income lender offers the same flexibility and speed as the typical bridge lender.

It’s true that many permanent stated-income mortgage lenders offer double-digit rates, but there are those who deliver more competitive pricing. Increased competition among stated-income lenders has driven pricing down on 30-year fixed loans to the 6% range. Additionally, qualifying parameters have loosened, allowing borrowers with credit scores in the low 600s to obtain competitive commercial mortgages.

Another benefit of a stated-income loan is that it can be used to finance various commercial property types. Banks are mainly focused on securing generic collateral only, but many stated-income lenders will finance special-purpose properties.

Since stated-income lenders aren’t beholden to the same regulations that banks are, they are able to offer greater underwriting flexibility. It is not unusual for a stated-income lender to offer leverage up to 80% of a property’s value, provide unrestricted cash out or even allow funds to pay off overdue income taxes. Since these lenders are focused on a property’s cash flow and value, rather than personal income, qualifying for a loan tends to be straightforward.

• • •

Using a stated-income commercial real estate lender that offers long-term financing is a great way to differentiate your product offerings. Offering a low-documentation, 30-year fixed mortgage at an affordable rate will appeal to bankable borrowers looking for a simpler process. Also, borrowers who are used to taking out an adjustable-rate mortgage or bridge loan can now qualify for a more favorable, long-term fixed loan that is just as accessible.

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