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Part 2: SBA 504 Authorizations … The Rest of the Story

Aug 2014

Last month, we announced that Florida First Capital was the top Certified Development Company (CDC) in Florida, producing more Small Business Administration (SBA) 504 loan authorizations and total project financing for nine months ending June 30, 2014, than the other four Florida CDCs combined.

While we are proud of that achievement, we don't believe that 504 authorizations alone are a proper measure of CDC performance. We think proper evaluation of CDCs should depend on how well they're doing in delivering capital, not just promising it.

Authorizations are the commitment letters of the SBA world. What financial institution measures its performance primarily by commitment letters?

To be clear, we are not suggesting that loan authorization statistics be scrapped. Rather, we are asking why the 504 lending industry promotes this metric as the primary measure of performance when a CDC's main objective is the delivery of loan funds to job creating small businesses. What are the costs of just making promises?

Consider this: if you are a commercial lender, what would the consequences be if you recognized your employees and incented them based on commitment letters without any reference to an eventual loan closing and the delivery of capital?

It would be disastrous on a number of levels. It would give an incentive to your employees to spend company resources and borrower time on an expensive process that is unlikely to result in anything good either for your institution or the borrower. That's the worst kind of incentive we can imagine.

A CDC exists to efficiently deliver low fixed cost, long-term growth and expansion capital to small businesses. That's the only outcome that matters. A system that fails to evaluate a CDC's success in actually delivering capital does a disservice to the small businesses which are the intended beneficiaries of SBA programs, and can even incent harmful behavior by SBA lenders. No one wants this, or benefits from it.

That's our opinion. So what's our suggestion?

We believe ultimately adding 504 funding statistics and other measures (e.g., closing cost and servicing rate information) to the SBA reporting matrix will provide a much truer image over time of how well CDCs are serving the small business community.

We also recognize this is no easy task. Often, funding lags authorization by a year or more (technically, a 504 authorization may take up to four years to fund). However, until the 504 industry begins telling the rest of the story of this process and its beneficial effect on small businesses, it is not telling the whole story, to the detriment of the program. We think this is an important dialogue to have, and we urge our commercial lending partners to make your thoughts known to us and the SBA.

For more information about SBA 504 loans in Florida,contact a Florida First Capital Loan Officer hereor email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.