Fountainhead Fridays: Why Some Lenders are Like Teenagers in Horror Movies…

We’re deeply sorry you missed our Fountainhead Friday blog post last week.  Call it “Fountainhead Fatigue.”  We’ve been so busy lately, it simply slipped our collective minds until it was too late in the day.  Hopefully it won’t happen again.

We just approved our latest loan for $4,354,000, so we’re now up to $20,768,000 in commitments and/or closings in the past 60 days or so, if you’re keeping score.  And we’ve got another $10,160,000 going to our credit committee early next week.  Poor Matt.  He closes our loans, and he’s about to become the most fatigued Fountainheader of us all… 😉

In recent days, we have been admiring our good friend and small business finance media authority, Bob Coleman’s expose  on the excesses that lie in one dark corner of small business lending:  100% financing by some SBA 7(a) lenders.  We’ve often wondered how these “preferred” lenders get away with this – what with the notorious (and most times unwarranted, in our humble opinion) “crack-downs” the Agency has subjected the 504 industry to in the past year.  We’re glad to see their trade association, NAGGL, line-up with us on the side of more reasonable and prudent lending.  Wisely, they (NAGGL) appear to have come out quickly to get ahead of what could/should become the latest wrath of the Agency.  U.S. taxpayers are unwisely put at risk with such reckless commercial lending – the equivalent of handing a sixteen-year-old your keys and a six-pack.

Now we’ve certainly heard the justifications over the years about giving these loans only to docs/vets/dentists – the kind of borrowers every bank covets – on the ill-advised premise that these folks are always the lowest credit risks.  Sadly, that myth needs challenging – kind of like how banking regulators dislike hospitality projects (so the bankers they regulate do as well) even though statistic after statistic demonstrates this NAICS code as one of the best in the SBA’s entire loan portfolio.  Odd.

Equity shortfalls, so the rationale goes, can simply be made up with additional collateral pledged (second liens on borrower’s personal residences, UCC filings on inventory, receivables, equipment and so forth… you know, the kinds of things borrowers REALLY love from their lender [NOT!]).  To us, that smacks of the hiring logic that rationalizes giving someone a job purely because they share an alma mater or some Greek letters with you.  Rarely does that seem to work out.

You don’t have to be a banking-school trained lender to understand the common sense rule of “having skin in the game.”  Get some “skin in the game” from a small businessperson on their loan, and you can sleep better at night knowing your default risk has been mitigated some.  Give them a pass because they spent more time in some ivory tower than you did, and don’t be surprised if they walk away from your loan when the going gets tough.

We’ve seen this movie before; it doesn’t end well.  Teenagers should NEVER run into the cemetery at night while being chased by a serial killer.  DUMB.  Should the Agency dig into this a little deeper, they’d note that same proverbial cemetery is littered with the dead carcasses of former 7(a) lenders who once marketed 100% financing high-and-low… my hunch is that many of their liquidations originated from these very same adolescent lenders.

All-time high secondary market premiums on SBA 7(a) loans (IF you can convince a borrower to take a floating interest rate on hard assets like real estate) along with some lenders providing 100% financing… is it any wonder the 7(a) industry is about to run out of money and require additional allocations from Congress?  We believe 7(a) loans certainly have their place and we like them… for business acquisitions, partner buyouts, working capital loans, and so forth… just not for commercial property.  But, as rates move up (and they have nowhere else to go BUT up from here), 7(a) prepays will accelerate as borrowers refinance-out of 7(a) loans and fewer and fewer small business borrowers will be duped into floating rate loans on real estate as the Media screams about rising rates.  The 7(a) premium bubble burst is coming… and then there will be a regression to the mean of historic premiums, as there always is.  We’re all for the secondary market providing added liquidity (obviously, we’ve created our own program ), but it needs to be sensible and based on tried-and-true lending standards.  The current secondary market for SBA 7(a) loans feels euphoric and outlandish, like our best days in high school… but equally superficial, ill-advised and fleeting.  It too will end.

See, we put ourselves in our borrowers shoes:  we wouldn’t accept variable rate financing for our commercial real estate purchases (and haven’t in the two SBA 504 loans our team here at Fountainhead has personally gotten for other business ventures), so why should our borrowers?  We believe fixed assets should be financed by fixed interest rates.  That seems to be Business 101 to us.  Of course, so does having a little skin in the game when you borrower money.  If your banker wouldn’t choose a 7(a) loan for his own commercial real estate purchase over a 504 loan (ask them), then maybe there’s some logic there that ought to be applied to his client(s)?  Maybe wiser heads will soon prevail around this whole matter?  It’s time for some in the industry to grow up and become more responsible.

Speaking of the commercial finance industry, S. 966 and H.R. 2266 need more bipartisan support.  These are the two bills in Congress enacting the CREED Act (Commercial Real Estate and Economic Development).  Read why here in my latest Huffington Post article from about a month ago.  This is one of the few truly “no-brainer” pieces of legislation everyone should be able to get behind.  Zero-subsidy, supplemental fees, only allowable for performing conventional commercial mortgages.  We think America’s entrepreneurs deserve having the 504 program allow refinancings… not just the 7(a).  Much like we think a minimum 10% equity requirement for SBA-financed commercial real estate loans should apply equally in the SBA’s SOP to 7(a) loans, not just 504s.  A little more parity between the SBA’s two flagship programs would serve America’s small businesses and taxpayers well.

rolling stones tourLastly, in something of a spontaneous corporate outing (and maybe reminiscent of our concert-going youth), about half of the Fountainhead team will be going to the Citrus Bowl tonight to cheer on another set of arguably fatigued individuals:  the Stones.  The result, no doubt, of subliminal influences from the daily blaring (Steve’s comment) of Fountainhead’s Pandora station.  We’re hoping Mick doesn’t pull a hip muscle tonight; Charlie doesn’t miss a beat; and Keith doesn’t… well, we’re not really sure.  Honestly, we’re not really that worried about Keith.  He’ll probably – improbably — out-live us all, while looking more fatigued than any of us the whole time!  😉

Work hard for you; play hard for us; and do our small part for the American Dream.  That’s not a bad mantra for us here at Fountainhead.

Enjoy your weekend and Rock on!

Your Friends at Fountainhead

P.S.  Oh and send us your commercial real estate loan opportunities!  We can certainly do more and Matt is still young — he can withstand the tsunami of fatigue, err… closings coming his way.  If Keith Richards can still be standing after all these years and “experiences,” certainly Matt has a LOOONG way to go… 😉

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