Have you ever wondered what the credit profile of a typical, successful 504 loan borrower looks like? As of our Fiscal Year End September 30, 2024, WBD Inc. had a 504 loan portfolio of 1,701 loans totaling $1.02 billion with only one loan 45 days delinquent and none beyond that.
In 2024, our repurchase rate by SBA was approximately 0.5%.
Our analysis of the credit score worksheets for all existing borrowers at the time of their 504 loan approval reveals the following averages:
- Collateral Coverage: 0.65x
- Debt to Worth Ratio: 8.0x (excluding approximately 18% of borrowers with a deficit net worth)
- Historical Debt Service Coverage Ratio: 1.10x (49% of borrowers had a DSC ratio below 1.0x)
- Management Experience: 3.5 years of on-site experience
- Personal Credit Score: 782
- Current Ratio: 2.4x
Despite the typical 504 loan applicant being highly leveraged with a collateral shortfall and tight or inadequate historical debt service coverage, WBD and our lending partners focus on business owners with relevant experience, a respectable personal credit score, and adequate working capital. This scoring system, implemented in January 2004, has served us well, with over 4,000 loans processed using this system.
The 504-loan program's structure has a direct, positive impact on borrower performance. The ability to inject a lower down payment allows borrowers to retain more cash in their business to fund operations. Additionally, providing a longer-term commitment (up to 25 years) with a fixed interest rate eliminates interest rate risk and offers a lower monthly payment with a longer amortization period.
You would expect that a loan portfolio with the credit profile identified above would experience more delinquencies than a traditional loan portfolio. However, the WBD portfolio benefits from the advantageous loan structure provided by the 504 program and has only experienced the level of delinquency previously noted.
In conclusion, the WBD portfolio demonstrates the effectiveness of the 504-loan program in supporting small businesses. By focusing on borrowers with strong personal credit scores, relevant management experience, and adequate working capital, WBD has been able to maintain a healthy loan portfolio with minimal delinquencies. The favorable loan structure provided by the 504 program continues to play a crucial role in the success of our borrowers and the overall performance of our portfolio.
We would like to extend our heartfelt gratitude to our cooperating lenders. Without your partnership and dedication, WBD would not have the thriving portfolio we have today. Your support in delivering the 504 loan product to small businesses in Wisconsin and Minnesota is invaluable, and we look forward to continuing our successful collaboration.
