A traditional strategy for reducing portfolio risk is to tighten lending standards and reduce availability of credit. This strategy is particularly harmful to small businesses that rely heavily on access to debt for sustainability and growth. The 7(a) program allows banks to have the best of all worlds. They can meet the needs of their small business customers, continue growing the loan portfolio and reduce portfolio risk while continuing to generate interest income. An example of a 7(a) loan achieving all four of these outcomes involves a very successful, rapidly growing company that needed additional capital for growth. The community bank had an existing relationship with this customer, but was uncomfortable with increasing its credit exposure. The bank had planned to ask the customer to find a new home, which neither the bank nor the borrower wanted to happen. The 7(a) guaranteed loan program enabled the bank to refinance its existing debt and provide the small business with new funds for growth and equipment purchases. Although the loan amount tripled, the credit exposure actually declined since the bank received a 90% guarantee from the SBA. The bank reduced its portfolio risk without stunting loan growth and retained an important customer.
“This exact scenario played out in a recent SBA 7(a) loan closed by ValueXpress and its partner bank, Lumbee Guaranty Bank,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “The bank was able to accommodate an important, long-standing client that was at its policy loan limit with the bank. The SBA 7(a) program provided a solution for all involved.” Lumbee, based in Pembroke, N.C., and ValueXpress are currently seeking addition SBA 7(a) opportunities in North and South Carolina.