Craig G. Francis SBA Loan Broker talks about Smaller Banks Funding Loans...
When most people consider an SBA Loan they generally think of going to their existing bank, especially if that bank has an advertising budget to promote its loans. The reality is that some of the most creative SBA Loans are given by smaller boutique banks. I recently email interviewed Craig G. Francis, an SBA Loan Broker, in order to clarify the reasons to go to a small bank versus a large bank.
David Kamatoy: Craig, why do most business owners assume that it will be better to approach a big bank for an SBA Loan rather than a small bank?
Craig G. Francis: Most business owners go to the 'large banks,' B of A, Wells Fargo, Union Bank, Citibank, and the other trillion-dollar banks, because their accounts are there. Most small businesses have their accounts with the large banks. So it is natural for a borrower to go to the bank that holds their accounts.
It almost goes without saying that these large banks are a preferred source of lending – if you are in very good financial condition with an excellent credit score. Going to the big banks is the line of least resistance. When business owners are pressed to find a spare minute in their busy day they rely on their friendly 'big' bank. Besides which, who advertises that they have the best terms, friendliest loan officers, and most service-oriented account representatives?
David Kamatoy: When they get the official "No" from a bank, does the search need to stop there?
Craig G. Francis: When a business owner goes to their friendly large bank and gets the bad news that their loan was turned down, they usually stop there. Their loan officer may actually tell the client why they are being turned down and volunteer it as the reason that the client will not get financing elsewhere. The loan officer knows that if the client goes to another bank and receives the loan, that borrower will change their accounts to the more cooperative lender.
Of course, if a borrower gets a loan from their large bank account then they are in good shape. Large banks usually have slightly lower lending rates. But if they get turned down, there are two choices: 1, stop looking, or 2, look elsewhere.
If the answer is 2, then the client must start the process of searching for an alternate bank. Since there are no sign posts or firm guidelines as to which bank will make the loan vitally needed by the business, the search must be done in a piecemeal basis. It usually consists of a borrower submitting loan applications in a shotgun fashion. But there are resources to help narrow the selection of lenders involved in this search. The SBA is an excellent resource, with names of every lender in the community that is still involved in lending. The Small Business Development Centers can provide guidelines to assist in the search. Local accountants know of user-friendly banks and other financial providers. Brokers and other businesses in similar lines also may know of lenders still willing to make loans.
David Kamatoy: It seems that SBA loan programs often get strange reputations because the wrong people apply for an SBA Loan. Clarify for our readers who should really consider an SBA Loan?
Craig G. Francis: Well, those out there with an existing business or who want to buy an existing business should consider an SBA loan. These loans are also appropriate for business owners who want to buy property associated with their business. Of course, having good credit, or partners with good credit, and some form of equity are very important, particularly right now.
David Kamatoy: What do you do as an SBA Loan Broker to facilitate the process?
Craig G. Francis: As a loan broker I wear two hats. I process an application and put it in a format that appeals to banks. I also tailor the package to the client's needs and then target the best lenders for the type of loan required by the clients, whether it be SBA guaranteed loans, conventional loans, or other lending suitable for the borrower.
David Kamatoy: Who ultimately makes a decision in funding an SBA Loan at a small or big bank? [How do you ultimately make a decision between applying for a loan from a small or big bank?]
Craig G. Francis: Deciding which bank to use, small or large, depends almost entirely on which bank makes the loan. Rates, terms and conditions do not vary significantly from bank to bank, so the best litmus test of what type of bank to use is the one who offers you the loan you need for your business; particularly in this economic and financing environment
A smaller bank may be able to make quicker niched decisions versus the larger banks that have a tendency to make decisions based on formulas.
David Kamatoy: How does the current 2010 economic climate affect applications?
Craig G. Francis: The financing environment has worsened steadily for the last 3 years. I think we are still in for a rough patch within bank lending for the next two years, particularly as it regards the commercial real estate lending community, which has suffered from capital losses due to failed real estate projects and continued business weakness.
The banking and business community will start to recover when the unemployment rate comes down. Notwithstanding federal interference, everything relies on the consumer health and unemployment rates today and into the foreseeable future.
Consumer spending is going to dictate lending, real estate values, and economic growth. Banking is reflective of these factors since the banks are still being intensely scrutinized by the FDIC and Fed as to their past and present loan portfolios, possibly even more tightly than the past 3 years. This scrutiny is causing the banks to evaluate every loan application with an eye to whether the deal makes sense today and far into the future. Underwriting continues to tighten, and banks make each loan with an eye to whether their decision will be criticized by the FDIC.
Several new lenders have reentered the lending arena with good capital bases...
My present pipeline of loans is very solid with many new applications, considerably more than 2009. This is due to the fact that several new lenders have reentered the lending arena with good capital bases, an eye to seeing how the deal can be done, and a certain knowledge that we will grow out of this economic rough patch. With so many banks now effectively out of business due to outright failure or credit constrictions, clients seek me out to help them with their loan applications. I know that if a business has survived until now, it is quite likely that they will be able to stay the course once the economy starts back upwards. Many lenders think this way as well.
David Kamatoy: How do you facilitate the loan and the relationship with Smaller Banks?
Craig G. Francis: When I broker a loan, I look more often to the smaller banks, knowing that they need loans to survive and new account relationships to fill their war chests, and thus are more likely to agree to the loan than a large lender. I have nothing against a large lender except to say that unless the client is in first rate financial condition with excellent cash flow, there is little chance that the mega bank will do the deal.
David Kamatoy: Are there any other suggestions you have for business owners looking for a loan?
Craig G. Francis: I think it’s very important that anyone thinking about applying for a loan get the best advice possible before they plop down $500 or more just to have some service fill out the paperwork. In some cases all they are going to get for that money is the rejection that would have happened even with a true expert, except that now they are out the up-front fee that they really didn’t need to pay. If someone comes to me and they aren’t going to qualify, I’m going to tell them that right up front without charging them for useless paperwork. In some situations I may even be able to give them suggestions as to other ways they can fund their project. It’s all about listening to the client, asking the right questions, and helping them find the right path.
David Kamatoy: Craig, thank you for your time.
Craig G. Francis: You’re welcome, David. And thank you.
Craig G. Francis is our associate, client and sponsor. David Kamatoy has the experience of working with start-up and emerging companies for over 10 years. As a former Investor Relations Director he has the unique understanding of funding projects and communicating with investors and entrepreneurs.