How can banks participate in the SBA 504 Loan Program?
Participating SBA loan lenders including banks, savings, and loan associations, and credit unions interested in partnering with BFC are required to execute a third-party lender certification as part of the loan closings.
Banks are eligible third-party SBA loan lenders in the 504 loan program. Banks that are interested in participating in the 504 loan program simply need to contact their local SBA district offices.
Typically for the loans that each provides, banks and CDCs, perform underwriting for loans separately but simultaneously. A Certified Development Company (CDC), such as BFC, is a nonprofit organization certified by the SBA to provide 504 loans to small businesses. When analyzing 504 loan applications, banks and CDCs examine traditional underwriting criteria such as cash flow, management, operating trends, and collateral.
Both the bank and BFC will underwrite the loan concurrently to meet borrower deadlines. While the terms and conditions of the bank and BFC loan may differ, they are coordinated to meet the needs of the borrower.
The third-party lender certification executed by the bank will then serve as confirmation that 504 loan program requirements have been met.
What are the benefits for the lenders?
The SBA 504 loan program helps open a new market to banks by adding a healthy, growing, business client base that may not meet conventional underwriting criteria. A bank’s first mortgage on the loan is 50% loan to value, minimizing collateral risk and exposure. In some circumstances, SBA 504 loans used for owner-occupied real estate are not counted in commercial real estate concentrations.
With SBA 504 financing, smaller banks can handle bigger projects and bigger banks can limit their exposure to certain industries. 90% financing also means that the majority of the customer’s funds remain on deposit. Hence, the bank can earn fees and interest on the interim loan and also generate income from sale premiums and loan fees. This is because the lenders’ first-lien loans are salable on the secondary market, providing lenders greater liquidity.
Finally, by making 504 loans, banks may qualify for Community Reinvestment Act (CRA) consideration.
How does the 504 loan program help banks meet community credit needs?
Through the SBA 504 loan program, banks can offer long-term financing to small businesses that may otherwise encounter difficulties with conventional financing. The SBA considers the 504 loan as a great option for new and growing businesses because of the low down payment required, fixed below-market interest rates, and long payment terms.
Banks participating in the 504 loan program may qualify for the Community Reinvestment Act (CRA) consideration. Loans of $1 million or less may qualify as small business loans and may be evaluated under the CRA lending test for banks of all sizes. As such, smaller banks may choose to grant small business loans of one million dollars or less.
For additional information on SBA loans’ benefits for bankers, please contact us!
Debenture Funding Calendar for 2020
When a small business applies for an SBA 504 loan through a CDC, the CDC passes the application to SBA for approval. Once the application is approved, 50% of the loan is sold to a lender such as a bank, credit union, or private lender.
This portion of the loan (50% of the total loan) is called the debenture.
As mentioned above, each debenture is backed up by the SBA for up to 85% of the loan value. This security makes debentures low-risk and safe for lenders.
For an in-depth explanation, read more here.
Have questions about SBA 504 loans or want to partner with us for an SBA 504 loan program? Call us a 1-800-SBA-REAL (722-7325) or submit a contact form and it’ll be our pleasure to help!
Business Financial Capital is Southern California’s leading SBA 504 loan Program expert, with over 20 years in the industry. We help California businesses grow by facilitating the premier tool for Real Estate financing — the SBA 504 loan.