In this space last month, we discussed three ways that lenders might think about how the SBA 504 refinance program can help find new business and assist some in your current portfolios. As a business banker for many years, I know that regular reviews of your portfolio with an eye toward mitigating the bank's risk while positioning your borrowers for success is a critical role you serve. Depending on the borrower's most recent financial performance and the current economic environment, each review is usually performed through a specific lens that seems appropriate at that time.
With one interest rate increase this year and two more anticipated, the signs all point to higher rates in the future. Are your borrowers ready? What are you doing to maximize their chances for success?
Without trying to date myself, I can recall a time when the prime rate was rapidly increasing and actually exceeded 20 percent. The bank was concerned about positioning the borrowers for success in the rising rate environment. Since the bank's loans had been primarily funded with deposits, providing fixed rates using conventional methods was not a viable option. The SBA became our source of long-term fixed rate financing rather than the "lender of last resort." By being proactive, we were able to provide many customers with long-term, single-digit fixed rates before prime hit double digits. We provided our customers with the staying power to survive and actually thrive in the rising rate environment while their competitors suffered. In addition, the quality of our SBA portfolio was actually stronger than our "conventional" portfolio. While that was an extreme case of rising interest rates, the concept applies to today's rising rate environment.
We know that during the past several years when rates were historically low, a majority of loans were originated on a variable rate basis or with a short-term fixed rate. These loans will now be maturing and, in most cases, be renewed at a higher rate. How high? For those you serve, there will be some that even a modest increase will be cause for pain, negatively impact growth, or even be the difference between success and failure. The question is, are you positioning your customers to survive and thrive?
Of course, one of the ways to protect the interests of your borrowers (and yours too) is to use the standard SBA 504 program or the SBA 504 refinance program to lock in up to 40 percent of their fixed asset needs into low, long-term, fixed-rate financing. Since the SBA 504 loans are funded through the sale of bonds in the secondary market, WBD is able to tap into a fixed-rate funding source that is not typically available to small businesses.
Over the past several years, WBD's SBA 504 portfolio has experienced substantial loan payouts as banks and customers alike have taken advantage of record low interest rates. However, many refinanced with shorter term, variable rate loans. On a positive note, what will remain in our portfolio are high-quality loans with historically low, long-term fixed rates. We think this is good news for both WBD and our current borrowers as interest rates continue to increase.
If you are wondering what customers think of our rates, just know the desire for long-term fixed rates is the second most popular reason for using the 504 program based on our customer survey results. The most popular reason is lower (10 percent) down payments. Both reasons positively impact cash flow and enhance working capital.
I encourage you to contact one of the WBD loan officers to discuss how they can assist you with the financing needs of your customers and prospects.
Schneider is CEO of WBD, Inc. - Your Business Finance Resource.