Tag: Small Business Loans

How To Price Small Dollar Small Business Loans

Small Business Lending

Mispricing of small balance loans is the major problem facing our industry and is a drag on many banks. It is difficult to make a $50,000 loan profitable. Let’s consider a typical small business commercial loan example: a five-year loan for equipment with a 1% origination fee. To make a 15% risk-adjusted return on equity, a banker must price this loan at a minimum of a 7.75% spread using direct costs and assuming average credit. That is a thick spread and not only could make your bank less competitive but also potentially increases the risk.

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