WBD’s loan portfolio is approaching $1.1 billion consisting of over 1,700 loans. For the past 20 years, we have been using a credit scoring system to help underwrite loan requests. We recently analyzed the credit scoring data to determine the credit profile of a typical SBA 504 borrower. Read on for key stats and takeaways.
The following are averages based on analyzing the WBD’s credit score worksheet of all existing borrowers at the time of the 504 loan approval:
- Collateral Coverage – average of .65x
- Debt to Worth Ratio - average of 0x, which excludes 18% of the borrowers that had a deficit net worth
- Historical Debt Service Coverage Ratio – average of10x; however, 49% were projection-based deals with the borrowers having a DSC ratio below 1.0x
- Management Experience – average of 5 years of on-site experience
- Personal Credit Score – average score of 782
- Current Ratio – average of 4x
Although the typical 504 loan applicant is highly leveraged with a collateral shortfall and tight or inadequate historical debt service coverage, WBD does focus on business owners with relevant experience, a respectable personal credit score and adequate working capital. WBD’s team of experienced loan officers will work with you & your borrower on projection-based deals. Our team will focus on the projection assumptions and to ensure there is adequate fallback working capital.
The loan structure provided by the 504-loan program has a direct, positive impact on the performance of the borrowers. The ability to inject a lower down payment enables the borrower to retain more cash in the business to fund operations. In addition, providing a longer-term commitment (up to 25 years) with a fixed interest rate eliminates interest rate risk and also offers a lower monthly payment with a longer amortization.
Typically, a loan portfolio consisting of borrowers with the Credit Profile identified above, would experience more delinquencies than a more traditional loan portfolio. Fortunately, that is not the case with WBD’s high quality loan portfolio. There are no loans over 45 days past due and only five under 45 days and no loans on deferral.
Please keep WBD in mind for undercapitalized, projection-based projects that have solid management and adequate working capital. A proper loan structure could enable these projects to become a performing, profitable relationship for your financial institution.
