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Small commercial lender’s underwriting method bucks convention

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Borrowing a page from the PPP playbook, a Florida community bank — BayFirst Financial — has begun offering Small Business Administration loans to early-stage companies based on their gross income. 

The Paycheck Protection Program moved in a similar direction in March 2021, permitting loan-amount calculations based on gross income, rather than net income, in an effort to push more funding to smaller enterprises, including freelancers, sole proprietors and independent contractors at the height of the pandemic. 

The policy change galvanized the program, helping drive the origination of 6.7 million loans for $277.7 billion between mid-February and May 4 last year, when program funds were exhausted. By contrast, SBA, which managed PPP, approved 5.2 million loans under the program in 2020.

BayFirst, too, is aiming to beef up its small-dollar business lending with a new program called BOLT that seeks to make credit available relatively quickly.

“We’re just leveraging our platform to give small businesses what they need right now, access to small-dollar loans,” said Thomas Zernick, President of BayFirst’s BayFirst National Bank unit. “Now that [Economic Injury Disaster Loans] are done, businesses have probably spent that money, there is no more PPP money, we are finding small businesses do have an appetite for capital to help them reboot.” 

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Thomas Zernick, President of BayFirst Financial's BayFirst National Bank unit

Thomas Zernick, BayFirst

BOLT loans, which are available nationally and capped at $150,000, run 10 years. They are priced at prime plus 2.75% and can be prequalified in hours with the goal of funding in seven to 10 days, according to the $921 million-asset BayFirst. 

The bank launched BOLT late in the second quarter to near immediate impact. As of June 30, BayFirst had originated 57 BOLT loans for $7.5 million. As of July 21, the company reported another 296 BOLT loans totaling $39 million either closed or in process. 

“We continue to sense businesses need access to some of these small-dollar loans, whether it’s $50,000, $75,000 or $100,000,” Zernick said. “We see some very significant demand for [BOLT] in the marketplace. … What would limit it is just sheer staffing, our bandwidth and our ability to process. We are obviously hiring in our SBA division right now. We’re excited as we bring on new teams.”

“We’re not really competing against other SBA banks” with BOLT, Zernick added. “We’re competing with nonbank lenders that do merchant cash advances, that do hard-money loans to these businesses that are desperate for $75,000 or $100,000 to help them support their growth.”

Although observers said using gross income to determine loan amounts is becoming more commonplace since the pandemic, it is still out-of-the-ordinary in the private sector. 

According to Kristen Conti, owner of the boutique real brokerage Peacock Premier Properties in Englewood, Florida, many SBA lenders “won’t use gross income because it doesn’t  show the borrower’s real ability to make the loan payments.”

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Indeed, Noah Grayson, president of South End Capital, a unit of the $2.2 billion-asset Stearns Bank in St. Cloud, Minnesota, called lending on gross income instead of business income or earnings before interest, taxes, depreciation and amortization (EBITDA) “an unusual practice in my opinion.” 

But Grayson and Conti each noted that the SBA gives lenders more flexibility in underwriting loans under $350,000, especially if the borrower’s credit score is higher. 

With smaller loans, “a preferred SBA lender may rely on other data points beside net income, such as [small-business credit scores], time in business, business credit and repayment history — and gross income — to determine eligibility,” Grayson said. 

BayFirst requires businesses applying for a BOLT loan to have been in operation at least two years with the owner possessing a minimum FICO score of 680. “You still have to have good personal credit, you have to have a good business credit score, you still have to meet the parameters of the program,” Zernick said.

BayFirst has been an SBA preferred lender for several years. The company had one of its best quarters ever in the second quarter, originating a total of $90 million in SBA loans, including a record $47 million in the month of June, Zelnick said. For BayFirst, SBA lending has become increasingly important since mortgage banking, its other major line of business, has been slowed by the rise in interest rates. 

“When we started residential lending in 2017, we knew that business was volatile,” Zelnick said. “It comes and goes with rates.” While second-quarter SBA originations jumped 90% year over year, residential loan originations, which totaled $306 million, declined by 48%. 

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At the same time, BayFirst is hoping to develop deeper relationships with some BOLT clients. 

“There’s nothing that makes us happier than to take someone who borrowed $200,000 from us a couple of years ago and help them buy a building, help them buy another company,” Zelnick said. 

Though Zelnick said many lenders have abandoned making smaller-dollar loans, some have embraced the sector in recent months. The $178 billion-asset Huntington Bancshares in Columbus, Ohio, has pledged $100 billion to make small-dollar SBA loans to women-, minority- and veteran-owned businesses as part of its Lift Local program.

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