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Starting Your Own SBA Department
With Tim Thomas, IBI Credit Union Services; Tucker Herring, The Liberty Group; Vern Hansen,
JR Bruno & Associates
Why SBA? High Initial Profitability At First $4,427,000 A Year (1/Mo x $368,920) $3,320,380 Guaranteed $298,825 Nine Point Premium -$74,706 Incentive to BDO $224,119 Gain (S/T FAS 166) +$33,203 Servicing on the guaranteed part +$66,405 interest on the UN guaranteed
part =$323,727 Year 1 on $53,124 in capital (8%
of the $1,106,000 You Kept) = 609% ROE Y1
$1,095,550 in SBA 504 FIRST mortgages $931,218 85% Guarantee Sold 6% Premium $55,973 Profit Contribution (S/T FAS 166) ($164,333 Balance kept on the books) +$10,271 Annual Interest $66,255 Contribution vs $13,147 in Capital. ROE Year 1 507%
SBA 504s Add Profit Initially Too
$10,000,000 Loan Growth Target $1,271,000 Retained on the Books $8,730,000 Shortfall Buy the Guarantee Full Faith and Credit Irrevocable for Secondary Market Buyer No Principal Risk No Accrued Interest Risk Control Principal Rrisk by Re-Underwriting
and Review
Thou Can Buy What Thou Dost Not Originate and Taketh No Credit Risk Just Premium Risk
Buy, Acquire, Expand Start Up Debt Refinance if it’s Good For You NO cash out For Profit $15MM NW/$5 MM Profit Rule 51/60 Rule Credit Elsewhee Test
7A in a Nutshell
Life Insurance Good Will Broker Fees 5010C Yes You can Do Construction +Perm Character Counts – Franchises All Available Collateral
7A Quirks
2% of Guarantee under $150K $3% of Guarantee 151 – 700 3.5% $701-$5MM Plus 3.5% Override on $$ over $1MM PPP on 15 Plus 5/3/1 Gross Rate 6% You Service 1% SBA Gets 0.55% x its 75% Guarantee Owner gets the Rest (Colson)
All Those Fees
RE Collateral to 25/25 P+275 Adjust Quarterly Pay Monthly 5/3/1 Prepay 90% LTV
Typical Deal
Sample Financing Project $1,000,000 First $500,000 6.5% fixed 5 = $3,375 PI Second $400,000
5.5% Fixed 20 = $2,751 PI Down Pmt $100,000
504
90% to Cost Max Purchase or Make Sense Refi Green $5.5 MM MFR $15/5 Rule 120% + Guarantee Check their Liquidity vs $ Financed Debenture (2nd) 0.65% + $2,000 10-20 Yr 2nd
1st Fully Amortized Tyo]pical 25/25 5+5
504 Quirks
1. Assess2. Who Has the Skills?3. SBA Office Contact4. Prepare Approval Diocumentation5. Credit Policy Manual6. Structure the Department7. Create Proceedures8. Budget9. Training10. Marketing and Sales Plan
One Small Step And Then Some
Credit Training and/or underwriting experience to include: Working knowledge of SBA business size and eligibility requirements Understanding of utilizing SOP 5010-C as a reference Working knowledge of balance sheet, P&L and corporate/partnership tax
return analysis Understanding of SBA packaging and credit requirements Understanding of personal and business cash flow analysis Understanding of the SBA approval process Ability to prospect for new clients and referral sources Ability to develop and execute marketing plan Aptitude for building new relationships with new clients and referral
sources Ability to present clearly to internal customers and borrowers regarding
products and services that will enhance existing relationships Present to and consult with management on business trends
BDO Skill Set
Lenders who book assets and hold those assets in their portfolio typically pay the BDO as a percentage of the total loan amount, such as the following:
Loan Volume Basis Points Paid as Commission $0 to $3MM 40 bps $3MM to $6MM 75 bps $6MM to $10MM 100 bps $10MM+ 150 bps
BDO CU COMP - Portfolio
Customer focused individual with expert knowledge of credit products and processes including thorough knowledge of SOP 50 10 10 5(C)
Strong organizational, analytical, communication and interpersonal skills.
Proven leadership abilities. Extensive knowledge of credit policy, procedures and
Bank regulations. Thorough understanding of commercial credit
structures, loan documentation, and related legal issues.
Knowledge of SBA operating procedures and eligibility guidelines
CO Skill Set
5010 C Know SBA policy on Franchises, goodwill,
citizenship, equity injection, life insurance, available collateral rule, felonies
Use NAICS Startups – Caution See Pages 20-22 for ideas of what to
do/avoid See p22 for Collateral Rules
Credit Policy
Pick Low Default industries Select Targets Market Directly’ See Sam’s Plan Chapter 7 P-22
Marketing: Pick Your Target
Loan $300,000 Guaranteed Portion $225,000 Un-Guaranteed Portion 75,000 Sell the guarantee for: $22,500 Let’s look at the $225,000 guaranteed part (Pretend it’s interest only the first year) Coupon 2.75 over Prime 6.000% = $13,500 paid by the borrower SBA Fee 0.675 = $ 1,519 goes to Colson Services who master services for
SBA You Service for 1.000 = $2,250 The investor, who buys the guaranteed part, gets the rest: 6%-0.675%-1%= 4.325. So your revenue on the guarantee is $22,500 premium, plus your servicing revenue
of $2,250, less whatever you are paying your outside SBA servicer.
Secondary Marketing
The Budget
Decisions Go For It, Hire a Consultant or CUSO and
build a solid program Risk too High, Buy Guaranteed Product to
supplement loan assets Keep risk Off Balance Sheet, originate for
wholesalers like Zions, Midwest Business Credit
Become a PLP, add Small Loan Advantage, Express
Servicing – Outsource or no? Processing Outsource or No? SBA Annual Audit
Other Issues
Secondary Marketing: Tim Thomas, Director Western Region, IBI Credit Union Services, [email protected] (303) 623-7500 Jared Livingston, Director Eastern Region, IBI Credit Union Services, [email protected] (303) 623-7500 Consulting: Vern Hansen, JR Bruno and Associates, [email protected] (602) 820-1337 rocessing:
Vern Hansen, JR Bruno and Associates, [email protected] (602) 820-1337
Mike O’Donnell, Colorado Lending Source [email protected] (303) 657-0010
Member Business Lending, West Jordan Ut, www.mblllc.com
Recruiting: Tucker Herring, The Liberty Group [email protected], (713) 961-7666 Professional Organizations: National Association of Government Guaranteed Lenders www.naggl.org National Association of Development Companies www.nadco.org
Resources and Experts