IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Jake Newcomb of Climate First Bank (https://www.climatefirstbank.com/):

Green SBA Lending – Contributing to a Better Tomorrow

Climate First Bank is a 4-year-old mission-focused bank that is dedicated to passing on an ecologically cleaner world to our descendants. The bank is making an enormous effort to lend to green companies both big and small. Since its onset, CFB has been a strong player in solar lending, making a positive impact to companies and homeowners alike as they make the thoughtful switch to clean energy.

The department that I work in is the SBA department, which is about a year old. Our function is to originate, underwrite, and close commercial loans with a government guaranty enhancement. This government guaranty enhancement allows the bank to make loans that would not normally be possible for a lender such as loans to start-ups, under- secured business acquisitions, and working capital transactions. Specifically, for the bank’s mission focus, the SBA guaranty allows CFB to originate green industry deals that, just by themselves might not get to a commercial credit approval.

Climate First is a PLP certified lender, which means that we have the ability of approving SBA 7a loans without the need to send them to the actual Small Business Administration for its concurrence. This PLP status is not only convenient in originating loans, it is an absolute necessity for borrowers seeking 7a funding. There are too many things that can go wrong in the complicated pursuit of government guaranteed loan funding to engage with a lender who is anything less than completely specialized. Not being specialized nullifies the desirability of the enhancement because it puts its assurance in question and makes an SBA-worthy credit request more difficult to get approved.

Now it should be noted that start-up credit requests are never easy to get done, even with an SBA PLP lender. You get these requests all the time in the SBA world and you hate that you’re sometimes in the position of having to crush people’s dreams. But there are things that are much worse than getting your dreams crushed. Being crushed by your dreams is far crueler. Seeing your life savings morph into bar stools and grease traps only to have these furnishings sit idle is many times more frightening than being told “no” by a banker. And as officers of the bank, we have the responsibility of at least showing people that theyare not yet ready for commercial credit if that is the case.

Business acquisitions, on the other hand, are usually a much easier sell to credit because they obviously have an established history of predictable cash flow that can debt service the loan request. It is in this area that Climate First has its sales focus and excels greatly. We have a high “airball” tolerance in that, if a deal looks good enough, we do not run away just because much of the 7a loan isn’t backed up by a ton of collateral. Ironically, these deals are often preferable because the large airball indicates that the to-be-sold business has a high enterprise value that exceeds far beyond any residual collateral value. These businesses have a high unsecured portion because they command a high sales price due to their greater predictability of strong, long-term cash flow. These transactions also attract more sophisticated and financially strong borrowers that are less likely to default. Most SBA shops tend to draw the opposite conclusions when facing these large airballs, but astute SBA lenders know the hidden advantages of large airball lending when engaging in the loan approval process.

It is important to realize that this commercial credit approval process is not so much a binary yes/no process than a spectrum of favorability. The outcome of this process is usually one of the following answers: absolutely, yes, probably yes, maybe—but needs more info, I don’t know-maybe not, no, or hell no. Where the government guaranty enhancement and mission focus work in tandem is in the maybe zone, where these two factors give just enough comfort to a credit officer that a “yes” can be pulled out of a “maybe.” All of this is not to say that Climate First will only do green industry loans. Quite the contrary. Just because something isn’t exactly relevant to environmental friendliness, doesn’t mean the bank won’t do it. A good deal is a good deal. Conversely, a green-focused deal that falls well below the threshold of approvability won’t get done. But a deal’s greenness does help and, as Climate First gains more and more experience in this area, we will further refine our ability to identify the amount of beneficial impact a deal’s greenness has when weighed against its credit risk. How much environmental utility does lending to a green transportation company actually create, for example? Will this utility outweigh the given credit risk? Only studied, iterative practice over time can shed light on these uncertainties.

So how is the credit risk evaluated in the first place? Most people in banking and business brokerage are already familiar with the 5 C’s of commercial credit (character, capacity, capital, collateral, and conditions) but I will delve into these items from an SBA perspective. The most important in the SBA world are character (a must for any borrower) and capacity (specifically the borrowing entity’s ability to cash flow the proposed debt service). Without sufficient cash flow, it’s usually a no-go. The credit request immediately lands at the negative end of the favorability spectrum. Capital is also important in that it reduces loan exposure to the bank and increases the debt service coverage ratio. It also is important in regards to post-closing liquidity. The nest egg that the borrower can fall back on during tough times is definitely valuable especially with those larger deals. Collateral, while important, doesn’t haunt SBA lenders as much as our conventional counterparts precisely because of the loan loss guaranty credit enhancement.

Credit conditions speak to the more intangible elements of the loan—the ones where it’s less easy to crunch hard numbers. Various global economic and industry factors play into a credit’s conditional analysis. And, at Climate First, this is the part where the alignment with its mission is scrutinized. Furthermore, a borrower’s own experience is valued highly in this determination. Ideally, a borrower has industry experience within the industry he or she is wanting to enter with the credit request, but, if not, he or she should have strong translatable experience. The qualification of what constitutes appropriate translatable experience to a field is inherently subjective and is what distinguishes good, solid SBA lenders from the rest.

Of course, none of these factors are absolute. While Climate First, just as any lender, has certain minimum standards for these 5 C’s, they are handled on a case-by-case basis for every deal. What might be an acceptable debt service coverage for a heavily collateralized acquisition might not suffice for one that has less assets to fall back on, etc. What is always absolute, however, is our adherence to SBA eligibility. With that there is no gray area. If a lender plays fast and loose with SBA eligibility, it could not only lose its guarantees on deals that go into default, but can also lose its PLP status altogether if things get bad enough. If all of that happens, you are no longer an SBA shop. So, eligibility is treated with a degree of sacredness that is rarely seen any more in the 21st Century financial industry. It’s what we always have to fall back on as SBA lenders and what we can benchmark ourselves in determining if we are originating these loans in the right way. In the end, as stewards of the bank’s resources and value-providers to our clients, doing things the right way is the best we can ask of ourselves and the best way to ensure the survivability of our bank’s business model and mission. Lending to businesses has always been and will always be filled with uncertainty, but the faithfulness to our core values keeps us from avoiding disaster.

The views expressed in this blog are my own and do not necessarily reflect the views of my employer.

Jake Newcomb is a Vice President & Senior SBA Business Development Officer with Climate First Bank specializing in financing for buyers acquiring privately held companies, family businesses, and owner occupied commercial real estate in Washington. If you have questions about the content of this article or any area relevant to business acquisition financing he would welcome you to contact him at (904) 510-0803 or jake.newcomb@climatefirstbank.com

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.