BoeFly Case Study: The economics of selling SBA guaranteed loans

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In today's regulatory environment in which banks are forced to constantly focus on capital ratios, creative lenders are increasingly originating SBA loans and quickly selling off the guarantee. Lenders who choose to sell their loans enjoy the benefit of increasing liquidity to make more loans. This case study provides a brief review of the process and economics involved in the SBA secondary market.

The Small Business Administration (SBA) is the federal agency tasked with supporting the growth of small businesses through various loan programs. The SBA's flagship loan program, the 7(a) program, provides a guarantee of up to 90% on loans made to eligible businesses. In the event a loan defaults, the bank is covered for the guaranteed amount. For decades, investors have paid a premium to banks to acquire the guaranteed portion. The sale of the guarantee is seamless to the end-borrower and profitable for the bank.

The economics are compelling: Consider the following sample loan sale:

"My bank's ability to originate SBA loans and quickly sell off the guarantee is critical in the current credit environment. When we sell an SBA loan on BoeFly we create profitable servicing income and achieve liquidity to make even more loans. Plus the process is seamless to our valued bank clients."
David Bridgeman, President and CEO Pinnacle Bank of Florida

Following the sale of the $900,000 guaranteed portion, the seller receives $90,000 in premium income. The seller also earns 1% of the guarantee balance annually (1%*$900,000=$9,000) to cover the expense of servicing the sold portion. The seller retains a $100,000 asset representing the unguaranteed balance. Netting the retained portion of $100,000 with the sale price of $990,000 leaves the lender with a mere $10,000 at risk before considering the benefit of servicing income (~$9000 in year 1). After year one, the Lender's Return on Net Cash is close to 150%. And with the captured liquidity of $990,000, the bank can make a new loan to another worthy borrower.

The process of selling a loan: Any of the more than 2,300 approved SBA lenders can access instant liquidity by selling off the guaranteed portion of the loans they make. After a loan closes, lenders can offer the loan for sale to an active group of buyers in the market. BoeFly members enjoy a competitive bidding environment for SBA loan sales. BoeFly accesses the widest group of SBA loan buyers including the SBA Pool Assemblers, so vital to the SBA marketplace.

When a seller (the lender) selects the winning bid, the loan seller is required to complete SBA Form 1086 as part of the settlement process. BoeFly members receive instant online access to the completed form. The ultimate settlement is handled by SBA's Fiscal Transfer Agent - Colson Services. In addition to the SBA Form 1086, a typical lender selling for premium will also need to calculate the gain-on-sale, factoring in a proper discount rate and current prepayment speeds. BoeFly provides members with these key market observable assumptions and a gain-on-sale calculator, streamlining the sale process for the lender. The originator continues to service the entire loan and the transaction is seamless to the borrower.

The Bottom Line: SBA loan sales are a highly profitable way for banks to support the borrowing needs of their worthy clients without straining capital ratios.