SBA loan originators tackle paperwork to make loans work

Hills Bank & Trust Co., though headquartered in humble Hills, Iowa, is one of the highest generators of SBA loans in Iowa on a perennial basis.

So far this year, Hills Bank has approved at least 30 loans - more than any other bank in Iowa.

“The SBA Guaranty program allows the bank to work with customers that we might initially have to turn away due to a higher element of risk - sometimes due to the lack of available security for a loan,” said John Benson, Hills Bank executive vice president.

The SBA guarantee helps to mitigate some of the risk of a business loan, and can make the difference in deciding whether to underwrite a loan if other factors are favorable, Benson adds.

One result: more first-time business customers.

“Hills Bank believes that helping a business obtain its first loan can lead to a lifelong customer,” Benson noted.

The SBA offers a variety of lending programs to meet specific business needs. Under most of them, the SBA guarantees repayment of up to 80 percent of a loan to the lender if the loan meets specific underwriting criteria.

The guarantee works to reduce the risk to the lender making the loan because most of the money will be recoverable through the guarantee if the borrower cannot repay.

That additional element of SBA loan backing can add a fairly thick layer of paperwork to the lending process, but lenders that have taken the additional step of becoming an SBA Preferred Lender can speed the approval process. Preferred lenders have authority for loan approval and closing, allowing them to provide expedited service.

It's the highest level of autonomy the SBA allows to lenders, and Hills Bank has it.

Originating SBA loans costs somewhat more than conventional loans because of that additional layer of reviews to meet SBA criteria.

“An SBA loan origination process involves going over the SBA paperwork, different document preparation and other behind-the-scenes functions done by various bank departments,” Benson said. “Hills Bank & Trust absorbs the cost, which is mainly staff training and staff time devoted to the loan preparation.”

Commercial lending experts at Hills Bank said the relatively recent SBA Express program, which speeds approval of loans for smaller amounts, has been a boost to the bank's SBA lending.

Underwriting is done within the bank without having to go outside to the SBA for a determination. Borrowers can get an answer on loan applications in 36 hours or even less, and interest rates can be lower than some other SBA programs.

“It was more compatible with the way we're used to doing business,” said Tim Smith, senior vice president of commercial lending for the bank's Iowa City operations.

One SBA program that doesn't even involve a SBA guarantee has performed well for Hills Bank in the past two years. The SBA 504 program is designed to stimulate economic development through job creation and meeting other national economic goals, such as more minority business ownership.

It is used for loans secured by fixed assets, primarily real estate and equipment.

The upside of the 504 program is that it offers long-term financing with the up to 40 percent of the amount at a fixed interest rate. Last year, the program was extended by the SBA to refinancing of existing loans.

The prospect of having fixed interest rates over such a long term is relatively uncommon in commercial financing, explained Tim Fitzgerald, senior vice president of commercial lending for Hills Bank in Cedar Rapids. He said the bank retains 50 percent of the loan and SBA retains the remaining amount - up to 40 percent, at a fixed rate.

The borrower gets to lock in the rate - which stood at 4.8 percent in October - for 20 years.

“In the commercial world, being able to lock in a 20-year fixed rate is unheard of,” explained Dennis Lindell, executive director of the Iowa Business Growth Co., an SBA 504 certified development company based in Johnston.

Iowa Business Growth does the underwriting and packaging of 504 loans, working with banks that originate the loans.

“To come up with 10 percent versus 20 or more percent leaves much more working capital within the company,” Lindell said.

Some borrowers come to Hills Bank with an interest in a specific SBA program recommended by one of the SBA's Small Business Development Centers. More often, Hills Bank introduces the borrower to a specific program.

“Obviously with the volatility in the lending environment we've got now, we do dig a little deeper in the bag of products available and look for different options than a few years ago,” Fitzgerald said.

Cedar Rapids Bank & Trust Co. has grown to become one of the state's most active SBA lenders within just a few years. Its SBA loan activity lead all banks in the state by dollar volume in 2010, and so far this year - at $22.97 million - is leading the state's banks again.

“Cedar Rapids Bank & Trust has a vested interest in giving back to this community and helping it grow and prosper,” said James Klein, senior vice president, retail banking manager.

“It's a win-win for everyone involved.”

At Cedar Rapids Bank & Trust, the heaviest SBA loan volume is in the 7A program, the mainstay SBA guaranteed loan program for which the agency is known. Klein said the bank is also seeing growth in its SBA Express loan activity.

Cedar Rapids Bank & Trust has been a SBA Preferred Lender since 2006. That preferred status recognizes the bank's proficiency in processing SBA loans.

Among banks with a large presence in the Corridor, institutions that ranked high in SBA loan approvals this year included Wells Fargo, U.S. Bank, Farmers State Bank, Guaranty Bank & Trust and Liberty Bank.