The perspective of one SBA lender
Last week as I was sipping my first of two pre-8am coffees, I came across a headline in the WSJ that caught my eye:
“The Money Has Stopped Flowing in Commercial Real Estate”
The timing was ironic as I had just finished reviewing our own pipeline of SBA loans (both those headed towards closing and those that have already closed) a few sips earlier and was struck by the considerable number of real estate purchases and projects we are financing. It was definitely time to reflect!
Sip. Ponder. Sip.
As I thought about it some more, these two seemingly contradictory facts actually make total sense. This is because traditional banks, legitimately worried about their liquidity and real estate loan portfolios, stopped lending while SBA lenders like us have seized the opportunity and stepped up to finance deserving projects.
What does it take for us, by all measures a conservative lender, to extend credit to a real estate project?
First and foremost, an experienced borrower. It is rough seas out there. Not just today, but always. An experienced operator has successfully navigated challenging environments before, giving us the confidence to extend credit despite the uncertainties.
Next, realistic projections. We study projections more closely than we do appraisals; the ability of the business to service its mortgage is a critical component of our credit decision. At the same time, we are troubled by aggressive projections, those sharply diverging from historical performance and/or benchmarks. We are far more likely to extend credit based on moderate projections (that service the debt) than to those showing blowout growth.
Lastly, appropriate capitalization. Closely related to point #2, we look for a business to be capitalized appropriately. Not necessarily the dreaded “we need more equity,” but rather a good mix of our debt, seller financing, a line of credit, and equity. More than anything, we want to see a post-transaction liquidity position, and will often prefer a lower equity injection to accomplish that.
So, no, loans for real estate projects have definitely not stopped, at least not for us. I’m looking forward to discussing your next project, real estate or otherwise. An SBA loan is often a great solution. Let’s talk.