Thread by @SBA_Matthias

One question has comes up when I speak with clients and prospects on a weekly basis is why some lenders offer fixed rate SBA loans, while others offer variable rate SBA loans. In this thread, I do a deep dive to explain the reasoning 🧵 👇

#sba #smb #acquisitions #entrepreneurs

1 - How SBA Loans Work

➡️ SBA is a risk sharing program that involves 3 parties: 1) the Borrower, 2) the lender & 3) the bank

2 - How SBA Loans Work (Cont.)

➡️ SBA insures (guarantees) a specific portion of the SBA loan amount. This is insurance for the bank to insure against the chance that the borrower defaults. For loans over $150,000, the SBA insures 75% of the loan amount.

3 - The Current Interest Rate Environment: a Macroeconomic Backdrop

➡️ SBA loans are benchmarked to the Prime rate.

➡️ At the start of 2022, Prime was 3.50%

➡️ As of 12/15/2022, Prime is 7.50%

➡️ Prime has increased 4% since the start of the year

4 - Secondary Market Loan Sales

➡️ With SBA 7(a) loans, the most common type of SBA loan used for business acquisition financing, banks have 2 options at their disposal to make money from the loan: 1) Hold on balance sheet, or 2) Sell the guaranteed portion

5 - Secondary Market Loan Sales (Cont.)

➡️ What Is the Guaranteed Portion?

➡️ The guaranteed portion of an SBA loan is the portion that is insured.

➡️ For a $1 Million SBA loan, $750,000 is the guaranteed or insured portion of the SBA loan

6 - Secondary Market Loan Sales (Cont.)

➡️ When a bank is contemplating whether to buy or hold the guaranteed portion of the SBA loan, they look at the current conditions of the secondary market. Below is the current conditions as of 12/19/2022:

7 - Secondary Market Loan Sales (Cont.)

➡️ In this example, I am going to explain how a bank makes money selling an SBA loan that is a 10 year loan priced at Prime + 2.75% (variable)

➡️ What does 107.375 mean exactly?

8 - Secondary Market Loan Sales (Cont.)

➡️ With a $1 million SBA 7(a), $750,000 is guaranteed (75% of $1 million)

➡️ Bank's profit is 7.375 * $750K = $55,312.50

9 - A Comparison with Fixed Rate SBA Loans:

➡️Since we are currently in a rising rate environment, secondary market investors have a preference to buy variable rate loans, rather than fixed rate loans

10 - A Comparison with Fixed Rate SBA Loans:

➡️ Note below, how all of the numbers are significantly below the 107.375 number referenced in the prior tweet

➡️ Investors don't want fixed rate SBA loans

11 - Back to Secondary Market Sales

➡️ Most banks that I know & work with (not all) have a preference to sell off the guaranteed portion of their SBA loans

➡️ This is how the revenue model of the bank is built

12 - Your Loan & A Bank's Decision

➡️ If a bank is selling off the guaranteed portion of the SBA loan, and the market favors variable rate over fixed rate, banks prefer to have their SBA loans also be variable rate

➡️ 85% of the SBA lenders that I work with only offer variable

13 - Is Variable Wise for You

➡️ If we are at or close to the top of rate hikes, a variable rate is better for you

➡️ You're loan payment will go down at the point when rates stabilize

14 - Is Variable Wise for You

➡️ New York Federal Reserve President John Williams was quoted in November, mentioning that rates may go back down in 2024 👇

reuters.com/markets/us/fed…

15 - Closing Remarks & Making a Decision

➡️ Most banks offer only variable interest rates

➡️ Banks that offer both tend to price in a higher spread for fixed in increments

➡️ We may be at or close to the top of peak interest rates

16 - Closing Remarks & Making a Decision

➡️ I hope that you found this thread insightful & useful

➡️ Please feel welcome to comment or RT

➡️ Please feel welcome to DM me with any deal-specific questions

Correction to above thread: Prime has increased 3.25% in 2022. The first rate hike that went into place in March was 25 basis points. Thanks @SBA_Ray for catching this! Two sets of eyes are always better than one :)