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Premium Risk
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Premium Risk

If you buy a guaranteed loan and it defaults and gets repurchased, the PREMIUM you paid, to the extent it is not amortized, is lost. So you might buy a loan at 109% to par, and if you picked the wrong one, you get paid back too early at 100% to par, thereby losing 9 points. Thus it’s important to pick a good loan likely to perform. We prefer the existing business, with a proven cash flow, and strong sponsorship. Put a Federal guarantee on top of a good loan that has a track record, and good collateral, on a business that is running well and THAT is the credit you want. Not the startup unless you have substantial other collateral (realistically appraised house, cash, and strong outside cash flow in case the startup fails.)