SBA Lending to the Middle Market

OLYMPUS DIGITAL CAMERAEver since the SBA raised the loan limit in its flagship 7a program to $5MM, we have seen a number of opportunities to extend the SBA’s assistance to middle market companies seeking to restructure their debt under more cash flow sensitive terms.  There tends to be a misconception that SBA assistance is strictly for start-ups or “mom and pop” businesses.  However, we have utilized the SBA program to assist larger companies, often those that are large employers in the communities we serve.  A middle market company of $20MM in sales often has a large real estate facility and/or significant equipment needs, especially when facing a turnaround situation or adverse relationship with their bank.  While there are many ABL lenders to service these companies’ working capital and revolving credit needs, restructuring long term debt and extending some permanent working capital utilizing the hard assets is often a need that goes unmet.  That’s where an SBA loan can make a lot of sense.  SBA allows equipment debt to be financed over 10 years and real estate debt over 25 years.  Throw in some permanent working capital to pay down a “stagnant” line and a borrower could change the complexion of its balance sheet dramatically.  The problem is most SBA lenders have structured their departments to service the previously mentioned market of start-ups and “mom and pops”.  There is nothing wrong with this but if a lender truly wants to leverage the SBA programs to serve the middle market, they will need experienced lenders who know both commercial lending AND SBA Standard Operating Procedures (SOP).

If a lender specializes in Hotel lending, they need to analyze ADR, Occupancy and Rev PAR.  If they like gas stations, they need to look at traffic counts, gallonage, egress and jobber agreements.  Similarly, lenders that want to work with middle market companies need to understand current ratio, advance rates, UCA cash flow, inventory turns, A/R and A/P turns just to name a few.  Given the SBA increase in their loan limit to $5MM in 2010, the middle market presents a great opportunity to extend much needed long term credit.  “Middle Market” no longer means “too big” for SBA.  With a size limit of $5MM in net profit and $15MM in net worth, the SBA programs can now serve this market.  Lenders just need to adapt.

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