Small-Business Loans Spur Banking Exec’s Big Idea

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It’s not uncommon, particularly in a tough economy, for community banks to outsource departments such as human resources and information technology.

So, Brian Carlson figured, why not SBA lending?

The longtime banker and expert in U.S. Small Business Administration loans recently launched a firm in El Segundo to assist shorthanded community banks in making the government-backed loans.

SBA Complete, which opened its doors in August, is believed to be one of the country’s first SBA loan outsourcing firms.

“For the most part, the banks we talk to don’t appear to realize this was even available,” said Carlson, who until recently was chief executive of the former Excel National Bank in Beverly Hills.

Still, the model is catching on quickly with banks that want to make SBA loans, which are low risk yet profitable, but don’t do them often enough to justify the costs of hiring specialized staff.

Carlson said he already has 23 clients,

far more than he expected in just four months. The fast start has forced him to hire four more employees, bringing the staff count to 10.

The firm is getting its start just as the industry overall is starting to recover. Local SBA lending was up 13 percent over the past year, and 18 of the top 25 lenders in the L.A. market increased their SBA lending in 2011, according to the Business Journal’s list of the top SBA lenders (see page 16).

Bob Coleman, an industry expert who runs an SBA-focused publication called the Coleman Report, noted that about 80 percent of the nation’s 2,700 SBA lenders make five loans or fewer each year – all potential clients for outsourcing firms.

Coleman, who has known Carlson for years, said there have been individual consultants offering SBA services for some time. But there are few firms that specialize in the relatively untapped market.

“No one’s ever done this on this large of a scale before,” he said. “There have always been sole practitioners. This time they’re putting a group of people together, which is pretty cool for the industry.”

Consulting role

The business model is simple: Community banks making just the occasional SBA loan will refer potential borrowers to SBA Complete. The bank still funds the loan, but SBA Complete determines whether it meets SBA guidelines, outlines how the loan should be structured, ensures that all necessary documents are filled out and disburses the money.

The bank and the government still shoulder the risk, while Carlson’s firm serves in a consulting role, billing by the hour.

Carlson said running an internal SBA department would cost a minimum of $200,000, including salaries and overhead. By using an outsourcing firm, he said, small banks could save about 50 percent.

Bryan Stevens, chief executive of Citizens Bank of Chatsworth, a small lender in Illinois, said it made the most sense from a cost perspective to outsource its SBA department since he only intended to do about $12 million a year in SBA loans.

“You need to be doing about $15 million to $20 million a year to really make it affordable for a bank to hire its own staff,” he said. “To get the specialized personnel you need, it will cost you significantly more than if you hire (an outsourcing firm).”

Since October, Citizens Bank has used SBA Complete to process three loans. Stevens, who previously had worked with Carlson at now-defunct Temecula Valley Bank, said he opted for SBA Complete because of the firm’s depth of knowledge.

“They’re very detail oriented,” he said. “Brian has a banking background, so he understands the challenges that small community banks have.”

That understanding comes from Carlson’s experience, including his time at Excel, a small institution that nonetheless ranked among the 10 largest SBA lenders in the country during his tenure.

“My passion and focus has always been on SBA lending,” he said.

In fact, it was the bank’s decision to diversify its business away from SBA that ultimately led Carlson to strike out on his own. The bank recently changed its name to EH National Bank and said it would shift its focus to traditional loans for Armenian- and Lebanese-owned businesses.

Excel, however, lost $17 million over the past two years amid souring loans, including its government-backed products.

But Carlson remains respected in the industry.

“He’s been around for a long, long time,” Coleman said. “I’m a fan of what he does.”

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