I am mentioned several times in the September 2011 issue of Restaurant Finance Monitor John Hamburger. My input is directly loan based and I provide quick figures as to what you can expect by using our loan program for you next restaurant commercial financing project.

1. Volume 22, Number 9 • Restaurant Finance Monitor, 2808 Anthony Lane South, Minneapolis, MN 55418 • ISSN #1061-382X
September 20, 2011
Shifting Credit Risk To The Government
Access to capital is still bandied about as the primary cause According to the SBA’s statistics, 7(a) and 504 loans ap-
of economic malaise and high unemployment in the Unit- proved in 2010 increased nearly 19 percent over the same
ed States. The International Franchise and National Res- period in FY 2009, and dollar volume climbed 39 percent.
taurant Associations have taken up the cause on behalf of So far in 2011, the dollar volume of approved loans is up
their members, especially as it relates to start-up individuals 51% for the 7(a) program and 13% for the 504 program.
who generally have the most trouble getting loans.
Why are the SBA programs so popular now, when in years
The number of small business loans made by community past, the SBA was the lending program of last resort?
banks has declined since the recession, but it is difficult to
say for certain whether capital access is the primary issue There are a couple of reasons for its popularity. First of all,
and borrowers are being turned down in greater numbers, the SBA 7(a) program increased the total amount a small
or whether the economy is so stagnant that fewer small business could borrow with a government guaranty from
businesses find the need and business demand to borrow. $2 million to $5 million. This has resulted in an increase in
the average loan size from approximately $242,000 in 2010,
According to the Monitor’s review of recent FDIC statistics versus an average loan size of $364,000 in 2011.
on community bank commercial lending activity, the dol-
lar value of small business loans secured by real estate on And, more businesses qualify for SBA funding these days.
the books of 6,413 community banks insured by the FDIC In 2010, the SBA redefined what it meant to be a small
on June 30, 2011, declined from $307.3 billion in loans a business in order to attract more borrowers to its program
year ago to $292.3 billion this year, a decline of 4.9%. in light of the recession and calls by Congress for increased
credit. Many businesses now qualify for SBA financing
Commercial and industrial loans made to small businesses that previously had no chance of accessing the program
also declined from $277.0 billion last year to $250.1 billion because of their size. The SBA made it possible for borrow-
this year, a decrease of 9.7%. The actual number of real ers who previously didn’t qualify for net worth and income
estate and commercial industrial loans on the banks’ books reasons to qualify provided they had less than a $15 million
decreased by 7.1% and 4.4%, respectively over the past year. net worth and $5 million of average net income over the
Overall loan balances, according to the FDIC, have de- past two years.
clined in 10 of the past 11 quarters for all types of loans.
While the total dollar volume of 7(a) and 504 loans in-
Yet the story is different for loans guaranteed by the Small creased by $6.7 billion over last year, the actual number of
Business Administration. The SBA guarantees loans for loans was flat. Chris Hurn, CEO of Mercantile Capital, an
small businesses up to 75% and have been doing their best SBA 504 lender and regular blogger, claims the increase in
to free up capital, and in turn make themselves a more rel- loan size in the 7(a) program is because of the willingness
evant agency. The 7(a) program, a typical loan vehicle for of banks to include real estate in the 7(a) loan package and
small businesses, including restaurants and franchises, is bypass the 504 program, where the lender provides only
generally used to obtain financing when a company does 50% of the project. As for processing loans, most lenders
not qualify for conventional credit. The 504 program fi- we spoke to acknowledge that it’s just as much work to do
nances real estate, although real estate can also be financed a $1.0 million loan as a $100,000 loan in SBA, so they opt
in the 7(a) program, too. for the larger deals with the 7(a) program, including real
estate, if possible.
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2. It’s also very profitable for lenders to make SBA loans. The
current secondary market for selling the government guar-
anteed portion of SBA loans is pricing loans at a “range of
8.5% on a two-year maturity and as high as 14.7% on a
25-year maturity,” says Mike Rozman, chief strategy officer
of Boefly, an online lending platform. The nice premium
makes a government-guaranteed loan profitable upon issu-
ance and the bank can earn a fee for servicing the loan if
it sells it. If the bank decides not to sell the loan, the loan
guaranty makes it more valuable in the eyes of the bank
regulators during audit time.
It’s no surprise that some banks are shifting their conven-
tional small business loans to the Small Business Adminis-
tration’s guaranteed lending program, which doesn’t neces-
sarily result in more credit overall, but offloads more risk to
the government. Loans that might be made anyway on a
conventional basis are finding themselves in the SBA pool.
“Banks are using SBA as a risk mitigation tactic in provid-
ing credit for existing business clients,” says Ron Feldman,
CEO of Franchise America Finance.
Stephen Olear, Senior Franchise Counsel for the Los An-
geles office of the SBA has heard stories of lenders shifting
potential conventional loans to SBA, but doesn’t think it
is very pervasive. “The interest rate and terms on an SBA
guaranteed loan (prime + 2.75 and 25-year amortization)
are much better for the borrowers right now,” says Olear.
Would banks take on a marginal credit if they could get
the 75% guaranty offered by SBA? Laura Witmer, nation-
al franchise sales manager for Wells Fargo SBA Lending
doesn’t believe a bank would take that risk, even with the
guaranty. “No banker wants to get into a bad deal with all
the work that comes with a default,” says Witmer.
So on one hand you have bank regulators acting tough
with banks over capital requirements and impacting their
ability to lend, and on the other hand, you have a govern-
ment agency guaranteeing loans and making it easier for
banks to put the loans on their books. In both cases, the
government, not the market, is calling the shots.
—John Hamburger
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