Competition for quality small business borrowers is only getting fiercer. Projects and industries that were formerly “off limits” are now pillars of some bank’s lending strategies (think hotel lending). Businesses are demanding terms that even a few years ago were unfathomable. Finding a unique value proposition is imperative to compete for strong borrowers in this environment.
Many lenders have turned to the SBA 7(a) and USDA loan program in recent years to increase loan volume and fee income. While it is true that some lenders have discovered the advantages of the programs offered by the SBA, far fewer have identified the opportunities of using the USDA business lending programs. Banks willing to navigate the idiosyncrasies of USDA lending can offer borrowers terms that are far superior to the SBA products. With a number of programs designed to assist different groups in rural areas, the USDA aims to help a broad range of businesses.
Why Enter the USDA Market?
Although the USDA programs are limited to “rural” areas with 50,000 people or less, these regions have a surprisingly broad reach. Recent studies suggest that over 100 million people currently live in eligible areas, which covers 97% of the nation’s land mass. Despite the likelihood there are many potential borrowers within this population, very few lenders are active in the USDA space. In 2016, lenders across the nation issued less than $1.3 billion of new B&I loan volume, with just 50 lenders providing over 70% of the total volume.
Understanding how B&I loans can help banks be more competitive starts with understanding the market. Low program participation rates are evident although many solutions in response to a highly competitive market are available through the USDA program. It’s time for banks to differentiate themselves by exploring all of the unique advantages available through this dynamic and underutilized program.
How Can USDA Programs Help Borrowers?
While other guaranteed programs offer extended terms and higher loan-to-value, the terms on the USDA programs are even more favorable for qualified borrowers. The Rural Energy for America Program (REAP), the Farm Services Act (FSA) program and the Community Facilities (CF) program offer valuable terms, but today we’ll focus on the Business & Industry (B&I) loan guarantee program. This is the most similar to SBA and USDA lending in target audience, but with far more advantageous terms for the borrower:
- Terms as long as 30 years for real estate transactions
- Loan amounts up to $10 million (higher in certain situations)
- Favorable rates, including fixed rate options (or extended adjustment periods)
- Non-profits and non-owner occupied real estate can be eligible
- Favorable loan to value
How Can USDA Programs Help Banks?
There are several ways B&I loans can help banks increase profitability and manage liquidity. The B&I program offers lenders guarantees of 80% on loans up to $5 million and 70% on loans up to $10 million. By minimizing credit risk with higher guarantees and expanding the borrower pool through more attractive terms, this product allows banks to earn income on loans that might not have otherwise been issued. Additionally, should a lender choose to sell, investors are willing to pay higher premiums in the secondary market for guaranteed loan portions that carry a prepayment penalty, increasing the return for banks.
About Windsor Advantage, LLC
Windsor provides a comprehensive outsourced USDA and SBA and USDA loan department to lenders nationwide. With more than 150 years of collective government guaranteed lending experience, cutting edge systems and rigid controls, Windsor Advantage is uniquely qualified to support its clients to develop and implement a thoughtful and profitable USDA and SBA 7(a) and USDA loan program.
In the past 18 months, Windsor clients funded more than $150 million in USDA loans. The USDA loans processed by Windsor have made a significant impact in 17 states. With the proceeds from the loans in Windsor’s portfolio, more than 2,100 jobs have been created or maintained in rural communities across the country. As of March 31, 2017, Windsor’s USDA loan servicing portfolio exceeded $170 million.
Since 2010, Windsor has processed more than $1.2 billion in government guaranteed loans and currently services a portfolio of more than $1 billion in loans for more than 60 banks across the US. Windsor Advantage is based in Chicago, Illinois, with offices in Indianapolis, Los Angeles and Charleston, SC. For more information, call 312-248-8530 or visit WindsorAdvantage.com.
About the Author: Will McClain manages Windsor’s credit and structure department. This includes interfacing with lenders and other referral sources to ensure eligibility and the most efficient structure for each transaction. Will has helped fund over $150 million in USDA loans.