Does the bank have risk?
November 05, 2023
by a searcher from Northwestern University in Melbourne, FL, USA
I was speaking with a friend and he pointed something out that I had not thought about before. If the government is guaranteeing up to 85% of an SBA loan, and the lender is only willing to finance between 70 and 75%, that means they essentially have ZERO risk in the deal. Is this right?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) The non-guaranteed portion of the loan is at risk. Using the $100,000 example, the Bank would have $25,000 at risk. Now the Bank does share in the collateral with the SBA, so every dollar recovered in a liquidation would get split 25% / 75% with 25% going back to the Bank. If the Bank recovers 50% of the loan amount or $50,000, they would get $12,500 of the recovered funds (the rest would go to the SBA portion) and would only lose $12,500 on the loan in liquidation.
2) The Bank also has exposure to the costs associated with a Bank loan, which includes lost interest, time managing the loan, additional liquidation costs, and capital being tied up in a bad loan. This all comes at an additional cost to the Bank.
3) The SBA is like an insurance company. The first thing they do when a default occurs is they try to get out of their government guarantee. The SBA reviews the file and if they find that the Bank did anything wrong while documenting the loan they might further limit the amount they guarantee or they might reject the guarantee in totality. In this case the lender could have a complete loss (of course minus any recoveries in liquidation) on the loan and full exposure. This is part of the reason SBA lenders are so anal about being sure SBA loans get documented properly.
I hope this information is helpful. If you have additional questions please let me know.
from Sam Houston State University in 5324 Community Dr, Houston, TX 77005, USA